The value added tax : its causes and consequences
Keen, Michael and Lockwood, Ben (2007) The value added tax : its causes and consequences. Working Paper. [Coventry]: University of Warwick, Department of Economics. Warwick economic research papers (No.801).
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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.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HC Economic History and Conditions|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Value-added tax, Taxation|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||[Coventry]|
|Official Date:||May 2007|
|Number of Pages:||35|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Agha, Ali, and Jonathan Haughton, 1996, “Designing VAT systems: Some efficiency
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