Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/eui/euiwps/eco2007-09.html
   My bibliography  Save this paper

The Value Added Tax: Its Causes and Consequences

Author

Listed:
  • Michael Keen
  • Ben Lockwood
Abstract
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.

Suggested Citation

  • Michael Keen & Ben Lockwood, 2007. "The Value Added Tax: Its Causes and Consequences," Economics Working Papers ECO2007/09, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2007/09
    as

    Download full text from publisher

    File URL: http://cadmus.iue.it/dspace/bitstream/1814/6865/4/ECO-2007-09.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    2. Mr. Michael Keen & Mr. Murtaza H Syed, 2006. "Domestic Taxes and International Trade: Some Evidence," IMF Working Papers 2006/047, International Monetary Fund.
    3. 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.
    4. 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.
    5. 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.
    6. Ms. Sònia Muñoz & Stanley Sang-Wook Cho, 2003. "Social Impact of a Tax Reform: The Case of Ethiopia," IMF Working Papers 2003/232, International Monetary Fund.
    7. 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.
    8. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April.
    9. 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.
    10. 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.
    11. 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.
    12. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
    13. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 905-928, December.
    14. Agha, Ali & Haughton, Jonathan, 1996. "Designing VAT Systems: Some Efficiency Considerations," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 303-308, May.
    15. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440.
    16. 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.
    17. Mr. John Thornton & Fabian Bornhorst & Mr. Sanjeev Gupta, 2008. "Natural Resource Endowments, Governance, and the Domestic Revenue Effort: Evidence from a Panel of Countries," IMF Working Papers 2008/170, International Monetary Fund.
    18. 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.
    19. 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.
    20. Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September.
    21. Keen, Michael & Smith, Stephen, 2006. "VAT Fraud and Evasion: What Do We Know and What Can Be Done?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 861-887, December.
    22. Chun-Yan Kuo & Hatice Jenkins & Glenn Jenkins, 2006. "Is The Value Added Tax Naturally Progressive?," Working Paper 1059, Economics Department, Queen's University.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonio Gómez Gómez-Plana & Pedro Pascual Arzoz, 2011. "Fraude fiscal e IVA en España: incidencia en un modelo de equilibrio general," Hacienda Pública Española / Review of Public Economics, IEF, vol. 199(4), pages 9-52, December.
    2. Michael Keen, 2009. "What Do (and Don't) We Know about the Value Added Tax? A Review of Richard M. Bird and Pierre-Pascal Gendron's The VAT in Developing and Transitional Countries," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 159-170, March.
    3. Fikri R. Arrachman & Riatu M. Qibthiyyah, 2018. "The Relationship of VAT Rate and Revenues in the Case of Informality," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 64, pages 73-96, Juni.
    4. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 365-381, August.
    5. Mr. Michael Keen, 2012. "Taxation and Development: Again," IMF Working Papers 2012/220, International Monetary Fund.
    6. Bibek Adhikari, 2015. "When Does Introducing a Value-Added Tax Increase Economic Efficiency? Evidence from the Synthetic Control Method," Working Papers 1524, Tulane University, Department of Economics, revised Nov 2015.
    7. Bachas, Pierre & Gadenne, Lucie & Jensen, Anders, 2020. "Informality, Consumption Taxes and Redistribution," The Warwick Economics Research Paper Series (TWERPS) 1277, University of Warwick, Department of Economics.
    8. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.
    9. Luca Barbone & Richard Bird & Jaime Vázquez Caro, 2012. "The Costs of VAT: A Review of the Literature," CASE Network Reports 0106, CASE-Center for Social and Economic Research.
    10. Christian EBEKE & Hélène EHRHART, 2011. "Does VAT reduce the instability of tax revenues?," Working Papers 201124, CERDI.
    11. Mattéo Godin & Romain Houssa & Kelbesa Megersa, 2017. "The Performance of VAT in DGD-partner countries," BeFinD Working Papers 0116, University of Namur, Department of Economics.
    12. Romain Houssa & Kelbesa Megersa, 2017. "Institutional quality, economic development and the performance of VAT," BeFinD Working Papers 0115, University of Namur, Department of Economics.
    13. 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.
    14. Kodjo Adandohoin & Vigninou Gammadigbe, 2022. "The revenue efficiency consequences of the announcement of a tax transition reform: The case of WAEMU countries," African Development Review, African Development Bank, vol. 34(S1), pages 195-218, July.
    15. Céline DE QUATREBARBES & Luc SAVARD & Dorothée BOCCANFUSO, 2011. "Can the removal of VAT Exemptions support the Poor? The Case of Niger," Working Papers 201106, CERDI.
    16. Ronald Davies & Lourenço Paz, 2011. "Tariffs versus VAT in the presence of heterogeneous firms and an informal sector," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 533-554, October.
    17. Eduardo Lora & Johanna Fajardo-González, 2016. "Employment and taxes in Latin America: An empirical study of the effects of payroll, corporate income and value-added taxes on labor outcomes," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 35(Especial ), pages 75-117, January.
    18. Raghbendra Jha & T. Palanivel, 2007. "Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region," ASARC Working Papers 2007-02, The Australian National University, Australia South Asia Research Centre.
    19. Mario Mansour & Mr. Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa: Challenges from Globalization," IMF Working Papers 2009/157, International Monetary Fund.
    20. Hoseini, Mohammad, 2015. "Value-Addes Tax and Shadow Economy : the Role of Input-Output Linkages (revision of CentER Discussion Paper 2013-036)," Other publications TiSEM 56358907-5e47-49f6-9a74-f, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Value added tax; tax reform;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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:eui:euiwps:eco2007/09. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cécile Brière (email available below). General contact details of provider: https://edirc.repec.org/data/deiueit.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.