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Value-added Taxation and Consumption

  • James Alm

    ()

    (Department of Economics, Tulane University)

  • Asmaa El-Ganainy

    ()

    (Fiscal Affiars Department, International Monetary Fund (IMF))

One of the main rationales for taxing consumption rather than income is that it is believed that consumption taxes discourage consumption, encourage savings, and thus generate higher economic growth. However, empirical evidence on the actual effectiveness of consumption taxes in stimulating savings is very limited. In this paper, we estimate the impact of a broad-based consumption tax, the value-added tax (VAT), on the aggregate consumption of fifteen European Union countries over the period 1961-2005. Our empirical results indicate, across a variety of estimation methods and specifications, that a one percentage point increase in the VAT rate leads to roughly a one percent reduction in the level of aggregate consumption in the short run and to a somewhat larger reduction in the long run.

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File URL: http://econ.tulane.edu/RePEc/pdf/tul1203.pdf
File Function: First Version, 2012
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Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1203.

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Length: 34 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:tul:wpaper:1203
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