Preserve Production Efficiency
Does the Value-Added Tax Add Value? Lessons Using Administrative Data from a Diverse Set of Countries
Abstract: The value-added tax (VAT) is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue. Yet, in many countries there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose its desirable properties. We draw on firm-level administrative VAT records from 11 countries at different income levels to examine the functioning of real-world VAT systems. We document four stylized facts that capture departures from the textbook VAT model which are particularly pronounced in lower-income countries. We discuss the effects on VAT performance and simulate a counterfactual retail sales tax and a turnover tax. Despite its shortcomings, we conclude that the real-world VAT is superior to the alternatives.
Full Text »
Brockmeyer, Anne, Giulia Mascagni, Vedanth Nair, Mazhar Waseem, and Miguel Almunia. “Does the Value-Added Tax Add Value? Lessons Using Administrative Data from a Diverse Set of Countries.” Journal of Economic Perspectives38, no. 1 (2024): 107–32. https://doi.org/10.1257/jep.38.1.107.
The Value-Added Tax and Growth: Design Matters
Abstract: Previous research has shown that changes in the composition of tax revenue affect long-run growth. However, little is yet known about whether the way tax revenue is raised matters for growth. This paper examines whether, in the context of OECD countries, a revenue-neutral increase in the value-added tax (VAT), offset by a fall in income taxes, may have different effects on long-run growth depending on how the VAT is raised. We show that a revenue-neutral rise in the VAT promotes growth when it is raised through a rise in C-efficiency, while it does not when it is raised through a rise in the standard VAT rate, the rate applied to the largest portion of taxed consumption. C-efficiency measures the departure of the VAT from a perfectly enforced tax levied at a single rate on all consumption, which in advanced economies is largely due to the VAT that is not levied because of exemptions and reduced rates. Thus, our results suggest that an increase in C-efficiency, possibly reflecting the broadening of the VAT base through fewer exemptions and a more uniform rate structure with fewer reduced rates, promotes growth more than a rise in the standard rate.
Full Text »
Acosta-Ormaechea, Santiago, and Atsuyoshi Morozumi. “The Value-Added Tax and Growth: Design Matters.” International Tax and Public Finance 28, no. 5 (2021): 1211–41. https://doi.org/10.1007/s10797-021-09681-2.
The Anatomy of the VAT
Abstract: This paper sets out some tools for understanding the performance of the value added tax (VAT). Applying a decomposition of VAT revenues (as a share of GDP) to the universe of VATs over the last 20 years shows that developments have been driven much less by changes in standard rates than by changes in "C-efficiency" (an indicator of the departure of the VAT from a perfectly enforced tax levied at a uniform rate on all consumption). Decomposing C-efficiency for EU members into a "policy gap" (in turn divided into effects of rate differentiation and exemption) and a "compliance gap" (reflecting imperfect implementation) suggests that the former are in almost all cases far larger than the latter, with rate differentiation and exemptions playing roles that differ quite widely across countries.
Full Text »
Citation: Keen, Michael. “The Anatomy of the VAT.” National Tax Journal 66, no. 2 (2013): 423–46. https://doi.org/10.17310/ntj.2013.2.06.
The Collection Efficiency of the Value Added Tax: Theory and International Evidence
Abstract: This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax (VAT), where the collection efficiency is determined by the probability of audit and by the penalty on underpaying, and implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is affected by political economy considerations – greater polarization and political instability would reduce the efficiency of the tax collection, and collection is impacted by structural factors affecting the ease of tax evasion (such as urbanization, agriculture share, openness). We evaluate the VAT collection efficiency (VAT revenue over the aggregate consumption divided by the standard VAT rate) in a panel of 44 countries over 1970–99. A one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increases the VAT collection efficiency by 3.1% and 3.6%, respectively. A one standard deviation increase in urbanization, trade openness and the share of agriculture, changes the VAT collection efficiency by 12.7%, 3.9% and −4.8%, respectively. Qualitatively identical results apply for the ratio of VAT revenue to GDP divided by the standard VAT.
Full Text »
Aizenman, Joshua, and Yothin Jinjarak. “The Collection Efficiency of the Value Added Tax: Theory and International Evidence.” The Journal of International Trade & Economic Development 17, no. 3 (2008): 391–410. https://doi.org/10.1080/09638190802137059.
Is VAT the Best Way to Impose a General Consumption Tax in Developing Countries?
Abstract: In this paper we discuss some recent critical literature on VAT in developing countries relating to its revenue productivity, its equity, and its impact on the development of the formal economy. Illustrating our argument with reference to two recent country studies (of Ukraine and Jamaica) we conclude that while there is merit in many of the criticisms that have been made, on the whole if a country needs a general consumption tax, as most developing countries do, then VAT is the one to have in almost all case — although this conclusion certainly does not imply that the VAT already in force in most such countries is necessarily the ‘best’ VAT for their circumstances.
Full Text »
Bird, Richard M., and Pierre-Pascal Gendron. “Is VAT the Best Way to Impose a General Consumption Tax in Developing Countries?” International Studies Program Working Paper 06-17 (May 2006). http://ayspsrd.gsu.edu/ays/ispwps/paper0618.pdf.