VAT Effort
VAT effort provides a comparative measure of how effectively a country mobilises revenue from the VAT relative to its capacity to do so, given its structural, economic, and institutional environment. It moves beyond the limits of C-efficiency and VAT productivity—which evaluate revenue performance without adjusting for country-specific conditions—by explicitly controlling for the factors that shape a country’s potential VAT yield.
In theoretical terms, VAT effort is the ratio of a country’s actual VAT performance (typically measured as VAT revenue as a share of total final consumption) to its estimated VAT capacity. VAT capacity reflects the maximum VAT revenue that could reasonably be expected given the country’s structural characteristics—such as its level of economic development, institutional quality, openness to trade, and sectoral composition. A VAT effort of 1 therefore indicates that a country collects revenue consistent with its predicted capacity, while a ratio below 1 suggests underperformance and above 1 indicates a level of collection exceeding expectations, possibly reflecting policy overreach or excessive reliance on VAT.
This approach acknowledges that no two countries operate within the same fiscal environment. While C-efficiency assumes a common benchmark—treating every country as if it could achieve the same proportion of taxable consumption—VAT effort recognises that economic structure and governance quality limit what is achievable in practice. For example, a low-income country with large agricultural and informal sectors will naturally have a lower VAT capacity than a high-income, service-based economy, even if both have sound VAT design and compliance practices. Comparing their C-efficiencies without adjustment would therefore be misleading.
Interpreting VAT effort requires care:
A low VAT effort (e.g., below 0.7) indicates that a country collects substantially less revenue than its structural conditions would allow. This may point to weaknesses in VAT policy (e.g., narrow base, numerous exemptions) or administration (e.g., poor compliance management, refund arrears).
A high VAT effort (close to or above 1) indicates that the VAT system performs near or above its predicted capacity. While this may reflect effective administration or strong compliance, excessively high values can also signal overreliance on VAT or structural imbalances in the tax system, particularly if direct taxes are underutilised.
Conceptually, VAT effort does not replace C-efficiency or VAT productivity but complements them. C-efficiency captures how efficiently the VAT mobilises consumption-based revenue; VAT productivity relates VAT revenue to GDP; and VAT effort adds a third dimension by assessing how effectively a country collects VAT given what is feasible in its own context. Using all three indicators together allows policymakers to distinguish whether low VAT performance stems from policy design, administrative inefficiency, or structural constraints.
Finally, VAT effort serves a practical purpose for reform diagnostics. Countries with low VAT effort and high capacity have clear room to mobilise more revenue through base broadening, rate rationalisation, or improved compliance. Conversely, countries with high VAT effort but low capacity may need to diversify their tax mix or focus on long-term growth and formalisation rather than further VAT increases. For estimates of VAT effort, refer to van Oordt (2018).