The Value Added Tax : Its Causes and Consequences
Almost unknown in 1960, the value added tax (VAT) is now found in more than 130 countries, raises around 20 percent of the world’s tax revenue, and has been the centerpiece of tax reform in many developing countries. This paper explores the causes and consequences of the remarkable rise of the VAT. A key question is whether it has indeed proved, as its proponents claim, an especially effective form of taxation. To address this, it is first shown that a tax innovation—such as the introduction of a VAT—reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This observation leads to the estimation, on a panel of 143 countries for 25 years, of a system of equations describing both the probability of VAT adoption and the revenue impact of the VAT. The results point to a rich set of determinants of VAT adoption, this being more likely, for example, if a country has a program with the IMF and the less open it is to international trade. In the revenue equation, the presence of a VAT does indeed have a significant impact, but also a complex one, with a negative intercept effect counteracted by positive effects that are greater the higher are per capita income and, more tentatively, openness. While the sign of the revenue impact of the VAT is thus in general ambiguous, most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so (though this is less apparent in sub-Saharan Africa), and most without it seem likely to gain from its adoption.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: CV4 7AL COVENTRY|
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Joshua Aizenman & Yothin Jinjarak, 2008. "The collection efficiency of the Value Added Tax: Theory and international evidence," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(3), pages 391-410.
- Aizenman, Joshua & Jinjarak, Yothin, 2005. "The collection efficiency of the value added tax: theory and international evidence," Santa Cruz Department of Economics, Working Paper Series qt42d103zh, Department of Economics, UC Santa Cruz.
- John Piggott & John Whalley, 2001.
"VAT Base Broadening, Self Supply, and the Informal Sector,"
American Economic Review,
American Economic Association, vol. 91(4), pages 1084-1094, September.
- John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
- Michael Keen, 2007.
"VAT, Tariffs, and Withholding; Border Taxes and Informality in Developing Countries,"
IMF Working Papers
07/174, International Monetary Fund.
- Keen, Michael, 2008. "VAT, tariffs, and withholding: Border taxes and informality in developing countries," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1892-1906, October.
- Bovenberg, A.L., 1987. "Indirect taxation in developing countries : A general equilibrium approach," Other publications TiSEM adac046e-0845-4c4e-904a-5, Tilburg University, School of Economics and Management.
- Timothy Besley & Michael Smart, 2005.
"Fiscal restraints and voter welfare,"
LSE Research Online Documents on Economics
3769, London School of Economics and Political Science, LSE Library.
- Timothy Besley & Michael Smart, 2005. "Fiscal Restraints and Voter Welfare," STICERD - Political Economy and Public Policy Paper Series 06, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- A. Lans Bovenberg, 1987.
"Indirect Taxation in Developing Countries: A General Equilibrium Approach,"
IMF Staff Papers,
Palgrave Macmillan, vol. 34(2), pages 333-373, June.
- Ary Lars Bovenberg, 1986. "Indirect Taxation in Developing Countries; A General Equilibrium Approach," IMF Working Papers 86/1, International Monetary Fund.
- Wacziarg, Romain & Alesina, Alberto, 1998.
"Openness, Country Size and Government,"
4553014, Harvard University Department of Economics.
- Emran, M. Shahe & Stiglitz, Joseph E., 2005.
"On selective indirect tax reform in developing countries,"
Journal of Public Economics,
Elsevier, vol. 89(4), pages 599-623, April.
- M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
- Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association, vol. 59(4), pages 905-28, December.
- Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
- Jeremy Edwards & Michael Keen, 1994.
"Tax competition and Leviathon,"
IFS Working Papers
W94/07, Institute for Fiscal Studies.
- Rodrik, Dani, 1996.
"Why do More Open Economies Have Bigger Governments?,"
CEPR Discussion Papers
1388, C.E.P.R. Discussion Papers.
- Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
- Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
- John Thornton & Fabian Bornhorst & Sanjeev Gupta, 2008. "Natural Resource Endowments, Governance, and the Domestic Revenue Effort; Evidence from a Panel of Countries," IMF Working Papers 08/170, International Monetary Fund.
- Keen, Michael & Smith, Stephen, 2006.
"VAT Fraud and Evasion: What Do We Know and What Can Be Done?,"
National Tax Journal,
National Tax Association, vol. 59(4), pages 861-87, December.
- Stephen Smith & Michael Keen, 2007. "VAT Fraud and Evasion; What Do We Know, and What Can be Done?," IMF Working Papers 07/31, International Monetary Fund.
- Bird,Richard & Gendron,Pierre-Pascal, 2011.
"The VAT in Developing and Transitional Countries,"
Cambridge University Press, number 9781107401440, December.
- Glenn P. Jenkins & Hatice Jenkins & Chun-Yan Kuo, 2006. "Is the Value Added Tax Naturally Progressive?," Working Papers 1059, Queen's University, Department of Economics.
- SÃ²nia MuÃ±oz & Stanley Sang-Wook Cho, 2003. "Social Impact of a Tax Reform; The Case of Ethiopia," IMF Working Papers 03/232, International Monetary Fund.
- Agha, Ali & Haughton, Jonathan, 1996. "Designing VAT Systems: Some Efficiency Considerations," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 303-08, May.
- Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September.
- Kent Matthews & Jean Lloyd-Williams, 2000. "Have VAT rates reached their limit?: an empirical note," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 111-115.
- Kent Matthews, 2003. "VAT Evasion and VAT Avoidance: Is there a European Laffer curve for VAT?," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(1), pages 105-114.
When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:801. 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: (Margaret Nash)
If references are entirely missing, you can add them using this form.