IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11539.html
   My bibliography  Save this paper

The Collection Efficiency of the Value Added Tax: Theory and International Evidence

Author

Listed:
  • Joshua Aizenman
  • Yothin Jinjarak

Abstract

This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax [VAT]. We consider the case where the collection efficiency is determined by the probability of audit and by the penalty on underpaying. Implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is impacted by political economy considerations greater polarization and political instability would reduce the efficiency of the tax collection. In addition, collection is impacted by structural factors affecting the ease of tax evasion, like the urbanization level, the share of agriculture, and trade openness. Defining the collection efficiency of the VAT as the ratio of the VAT revenue to aggregate consumption divided by the standard VAT rate, we evaluate the evidence on VAT collection efficiency in a panel of 44 countries over 1970-99. The results are consistent with the theory - a one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increase the VAT collection efficiency by 3.1% and 3.6%, respectively. A one standard deviation increase in urbanization, trade openness, and the share of agriculture changes the VAT collection efficiency by 12.7%, 3.9%, and - 4.8%, respectively. In addition, a one standard deviation increase in GDP/Capita increases the tax efficiency by 8.1%. Qualitatively identical results apply for an alternative measure of VAT collection efficiency, defined by the ratio of VAT revenue to GDP divided by the standard VAT.

Suggested Citation

  • Joshua Aizenman & Yothin Jinjarak, 2005. "The Collection Efficiency of the Value Added Tax: Theory and International Evidence," NBER Working Papers 11539, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11539 Note: ITI PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11539.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ayhan Kose & Kenneth Rogoff & Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
    2. Raymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 471-500, April.
    3. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, pages 599-623.
    4. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, pages 563-577.
    5. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, pages 855-866.
    6. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics.
    7. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, pages 599-623.
    8. Alan J. Auerbach & Roger H. Gordon, 2002. "Taxation of Financial Services under a VAT," American Economic Review, American Economic Association, vol. 92(2), pages 411-416, May.
    9. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, pages 855-866.
    10. Gordon, Roger H. & Bo Nielsen, Soren, 1997. "Tax evasion in an open economy:: Value-added vs. income taxation," Journal of Public Economics, Elsevier, pages 173-197.
    11. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, pages 563-577.
    12. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    13. Joshua Aizenman, 2004. "Financial Opening and Development: Evidence and Policy Controversies," American Economic Review, American Economic Association, vol. 94(2), pages 65-70, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11539. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.