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Determinants of value - added tax revenue : a cross section analysis

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  • Bogetic, Zeljko
  • Hassan, Fareed

Abstract

Value-added tax (VAT) has become a major tax instrument in over 50 countries and an important element in tax policy advice to developing countries. But few studies have empirically tested some basic hypotheses about the performance and key feature of VAT as a revenue-raising instrument. The authors examine the main determinants of VAT revenue in a simple cross-country framework using data from 34 countries to answer certain key questions: What empirical relationship emerges from existing data on VAT revenue and VAT rates for countries with a single VAT rate? How much, on average, can a 1 percent increase in the VAT rate be expected to raise VAT revenue as measured by VAT-to-GDP ratio? What key determinants of VAT revenue emerge from a cross-country analysis of the full sample of countries? Is there a statistically significant difference in VAT revenue performance between countries with a single VAT rate and countries with multiple VAT rates? The results of their regressions generally confirm the conventional views on the key variables influencing VAT revenue performance: the rate, the base, and rate dispersion. The rate and the base coefficients are significant and with the expected positive sign in all of the estimated versions of the model. An estimated model is used with appropriate cavaets to predict VAT revenue potential in countries (such as Bulgaria) that are thinking of introducing a single rate VAT. They also find that - other things being constant - VAT generates higher revenue in countries with a single VAT rate than in countries with multiple VAT rates. The difference in the estimated models for the two country groups is statistically significant, indicating a structural change. However this change in the pattern of VAT revenues cannot be explained exclusively in terms of differences in rate structure. A satisfactory explanation must include other factors, such as the base and tax administration capacity. The key policy implications are simple: to provide superior revenues, VAT should be levied in a single rate on as broad a base as possible. And tax administration and enforcement must be tough to ensure compliance.

Suggested Citation

  • Bogetic, Zeljko & Hassan, Fareed, 1993. "Determinants of value - added tax revenue : a cross section analysis," Policy Research Working Paper Series 1203, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1203
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    References listed on IDEAS

    as
    1. Goode, Richard, 1993. "Tax advice to developing countries: An historical survey," World Development, Elsevier, vol. 21(1), pages 37-53, January.
    2. Vito Tanzi & Parthasarathi Shome, 1993. "A Primer on Tax Evasion," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 807-828, December.
    3. Mr. Vito Tanzi & Mr. Parthasarathi Shome, 1993. "A Primeron Tax Evasion," IMF Working Papers 1993/021, International Monetary Fund.
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    1. Marius Ikpe & Alwell Nteegah, 2013. "Value Added Tax and price stability in Nigeria: A partial equilibrium analysis," European Journal of Government and Economics, Europa Grande, vol. 2(2), pages 137-147, December.
    2. Ristić Milica & Todorović Jadranka Đurović & Đorđević Marina, 2019. "Factors of the Value Added Tax Collection Efficiency in the Republic of Serbia," Economic Themes, Sciendo, vol. 57(1), pages 35-49, March.
    3. Andrew Feltenstein & Jorge Martinez-Vazquez & Biplab Datta & Sohani Fatehin, 2022. "A general equilibrium model of Value Added Tax evasion: an application to Pakistan," International Economics and Economic Policy, Springer, vol. 19(3), pages 537-556, July.
    4. Astha Sen & Sally Wallace, 2017. "The Revenue Efficiency of India’s Sub-National VAT," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1705, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Zeljko Bogetic & Arye Hillman, 2005. "The Tax Base in Transition: The Case of Bulgaria, World Bank Policy Research Working Paper Series No. 1267 (March 1994), The World Bank," Public Economics 0510009, University Library of Munich, Germany.
    6. Maria Kazakova & Alexandr Knobel & Ilya Sokolov, 2010. "Quality of VAT administration in OECD countries and Russia. Reform of the Russian system of tax collection," Research Paper Series, Gaidar Institute for Economic Policy, issue 134P.
    7. Iswahyudi, Heru, 2018. "Where has the money gone?: The case of Value Added Tax revenue performance in Indonesia," MPRA Paper 89876, University Library of Munich, Germany.

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