## The Value-Added Tax: Its Causes and Consequences

_IMF Working Papers, July 1, 2007_

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**Canonical URL:** [The Value-Added Tax: Its Causes and Consequences](https://www.imf.org/en/publications/wp/issues/2016/12/31/the-value-added-tax-its-causes-and-consequences-21121)

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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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-value-added-tax-its-causes-and-consequences-21121_