The Value-Added Tax: Its Causes and Consequences
IMF Working Papers, July 1, 2007
Source details
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- The Value-Added Tax: Its Causes and Consequences
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Bibliographic details
- Authors: Ben Lockwood, Michael Keen
- Published: July 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867473.001
Key findings
- 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.
- The sign of the revenue impact of a VAT is generally ambiguous in the estimates.
- Despite ambiguity, most countries that have adopted a VAT "seem to have gained a more effective tax instrument in doing so."
Methodology and empirical approach
- The paper estimates, on a large panel, a system of equations describing:
- the probability of VAT adoption, and
- the revenue impact of the VAT.
- The analysis links the adoption decision to subsequent changes in the tax ratio under an optimizing government framework.
Subjects and analytical focus
- Subject: Personal income, Revenue administration, Tariffs, Tax efficiency, Value-added tax
- Keywords: dependent variable, open economy, revenue equation, VAT adoption, VAT dummy, WP
Policy implications
- Introducing a VAT can make taxation more efficient, but efficiency gains materialize only if the government responds by increasing the tax ratio.
- Policymakers considering VAT adoption should account for the conditions under which adoption will induce an optimizing government to adjust the overall tax mix.
Ben Lockwood and Michael Keen, July 1, 2007.