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Avoiding the Value Added Tax: Theory and Cross-Country Evidence

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  • Luiz de Mello

    (OECD)

Abstract

This paper develops a differential game of tax avoidance by modelling the interactions between a taxpayer and the tax authority. This framework is particularly useful for explicitly modelling situations of conflict. The solution to the game is a non-co-operative Nash that depends on the resources that need to be used by the tax authority to enforce legislation and the cost to be borne by the taxpayer in tax compliance, provided that the curvature of the utility functions is bounded. Empirical evidence is provided for the value added tax (VAT) using a cross-section of OECD and non-OECD countries. OECD indicators of tax administration efficiency are included in the regressions. The empirical findings show that VAT efficiency, defined as the ratio of collections as a share of consumption to the statutory rate, rises the lower the VAT rate, the lower the share of administrative costs in tax revenue (proxying for the efficiency of tax administration), the more pro-competition the regulatory framework in product markets (measuring non-tax incentives for non-compliance) and the better the country’s governance indicators (regulatory quality, rule of law and government effectiveness). This paper is forthcoming in the Public Finance Review. Évasion de la TVA : Théorie et Comparaisons Internationales Ce document développe un jeu différentiel des évasions fiscales en modélisant les interactions entre les contribuables et les administrations fiscales. Ce cadre est particulièrement adapté à la modélisation des situations de conflit. La solution du jeu est un équilibre de Nash non-coopératif qui dépend des ressources dont ont besoin les administrations fiscales pour appliquer la législation et les coûts imputés aux contribuables dans le respect des obligations fiscales, à condition que la dérivée première de la fonction d’utilité soit bornée. L’analyse empirique utilise la TVA d’un échantillon de pays de l’OCDE et non-OCDE. Les indicateurs OCDE d’efficacité des administrations fiscales sont intégrés aux régressions. Les résultats montrent que l’efficacité de la TVA (définie comme le ratio entre les revenus de la TVA divisé par la consommation et le taux de la TVA), augmente inversement au taux de la TVA et à la part des coûts administratifs dans les revenus des impôts (un indicateur d’efficacité des administrations fiscales). Par contre, l’efficacité de la TVA augment proportionnellement au biais pro-compétition des réglementations des marchés des produits et aux indicateurs de bonne gouvernance (qualité des réglementations, règle de droit et efficacité du gouvernement). A paraître prochainement dans Public Finance Review.

Suggested Citation

  • Luiz de Mello, 2008. "Avoiding the Value Added Tax: Theory and Cross-Country Evidence," OECD Economics Department Working Papers 604, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:604-en
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    File URL: http://dx.doi.org/10.1787/242167601452
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    Cited by:

    1. James Giesecke & Nhi Hoang Tran, 2012. "A general framework for measuring VAT compliance rates," Applied Economics, Taylor & Francis Journals, vol. 44(15), pages 1867-1889, May.
    2. Cemile Sancak & Jing Xing & Ricardo Velloso, 2010. "Tax Revenue Response to the Business Cycle," IMF Working Papers 10/71, International Monetary Fund.

    More about this item

    Keywords

    avoidance; differential game; evasion; jeu différentiel; taxe à la valeur ajoutée; TVA; value added tax; évasion;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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