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Institutional quality, economic development and the performance of VAT

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  • Romain Houssa

    (CRED, University of Namur)

  • Kelbesa Megersa

    (CRED, University of Namur)

Abstract

In this paper we test, empirically, to which extend the Value- Added Tax (VAT) is a relevant-policy option for developing countries aiming to improve upon their domestic resources mobilization (DRM). First, we investigate the contribution of VAT to tax collection across developed and developing countries. We also provide a comparative analysis between Sub-Saharan Africa (SSA) and other developing countries. Second, we examine the role of institutional quality in enhancing domestic-tax mobilization in the presence of VAT adoption. For these purposes, we employ a panel data model that takes into account the standard determinants of the tax-effort function as well as the institutional and geographical characteristics of countries. Analysis of data from 149 countries over the 1970 - 2013 period indicates that VAT adoption improved tax-revenue collection in both developed and developing (SSA and non SSA) countries. Moreover, the marginal effect of VAT adoption is estimated to be strong for SSA and other developing countries as compared to their developed counterparts. The positive effect of VAT on tax collection in SSA is reassuring because some earlier studies were not able to identify an overall positive effect for the region. We show that analysis of data over the recent period is important to find a positive effect for SSA. As regards the role of institutional quality, we find that, tax-revenue collection is higher in countries with a betterinstitutional quality - even before VAT adoption. Interestingly, we show that the gain from adopting VAT is maximized in such countries. Given VAT is by now adopted in almost all countries across the world, our findings suggest the need to promote reforms to improve the quality of institutions that facilitate tax collection in developing countries.

Suggested Citation

  • Romain Houssa & Kelbesa Megersa, 2017. "Institutional quality, economic development and the performance of VAT," BeFinD Working Papers 0115, University of Namur, Department of Economics.
  • Handle: RePEc:nam:befdwp:0115
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    3. Romain Houssa & Kelbesa Megersa, 2020. "Capacity Support for Domestic Revenue Mobilization - The case of Belgian development cooperation and partner countries," BeFinD Working Papers 0131, University of Namur, Department of Economics.

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    More about this item

    Keywords

    Value-Added Tax (VAT); Domestic Resources Mobilization (DRM); Tax Reform; Institutional Quality; Economic development;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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