Efficiency Aspects of the Value Added Tax

IMF Working Papers, August 22, 2025

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Examines the efficiency of the Value Added Tax (VAT), focusing on its role as a revenue-raising tool and its use to achieve non-revenue objectives.
Highlights the VAT's potential ability to generate revenue with minimal distortions, emphasizing advantages over alternative taxes such as turnover taxes and tariffs.
Explores the VAT as a macroeconomic policy tool, especially in counter-cyclical fiscal policy, and its potential to address environmental and health objectives.
Concludes that a well-designed and implemented VAT is a highly efficient revenue-raising tool, surpassing other forms of consumption taxation, while cautioning against its misuse in industrial policy and other contexts for which it is ill-suited.

VAT can generate revenue with minimal economic distortions compared with alternative consumption taxes.
VAT minimizes cascading effects of input taxation better than turnover taxes and tariffs.
The VAT can serve macroeconomic policy purposes, including counter-cyclical fiscal policy.
The VAT has potential applications for environmental and health objectives, subject to design considerations.
Misuse of VAT for industrial policy or other ill-suited objectives can undermine its efficiency.

Prioritize a well-designed and properly implemented VAT as a primary consumption tax for revenue raising.
Avoid substituting VAT with turnover taxes or tariffs when the goal is to reduce cascading input taxation.
Use VAT cautiously, and only where appropriate, for non-revenue objectives such as environmental and health goals; ensure design choices do not impair overall efficiency.
Refrain from applying VAT measures for industrial policy aims for which VAT is ill-suited, to prevent efficiency losses.

Ruud de Mooij, Shafik Hebous, and Michael Keen. "Efficiency Aspects of the Value Added Tax", IMF Working Papers 2025, 165 (2025), August 22, 2025.