The Value Added Tax and Growth: Design Matters
IMF Working Papers, May 7, 2019
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- The Value Added Tax and Growth: Design Matters
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Bibliographic details
- Authors: Santiago Acosta Ormaechea, Atsuyoshi Morozumi
- Published: May 7, 2019
- Series: IMF Working Papers
Overview
- Research question: Does the design of a tax matter for growth?
- Dataset: novel panel for 30 OECD countries over the 1970-2016 period.
- Focus: whether the value added tax (VAT) affects long-run growth differently when raised through the standard rate versus through C-efficiency (a measure of the departure of the VAT from a perfectly enforced tax levied at a single rate on all consumption).
Key findings
- For a given total tax revenue, a rise in the VAT, financed by a fall in income taxes, promotes growth only when the VAT is raised through C-efficiency.
- For a given VAT revenue, a rise in C-efficiency, offset by a fall in the standard rate, also promotes growth.
- Implication: in OECD countries broadening the VAT base through fewer reduced rates and exemptions is more conducive to higher long-run growth than a rise in the standard rate.
Analytical concepts and metrics
- C-efficiency: defined in the paper as the measure of the departure of the VAT from a perfectly enforced tax levied at a single rate on all consumption.
- Comparative policy experiments considered:
- Increase VAT revenue while reducing income taxes (total tax revenue held constant).
- Increase C-efficiency while reducing the standard VAT rate (VAT revenue held constant).
Policy implications
- Base broadening (reducing reduced rates and exemptions) that raises C-efficiency can be growth-promoting relative to increasing the standard VAT rate.
- Revenue-neutral tax reforms that shift revenue from income taxes to a more efficient VAT base can support higher long-run growth when those reforms increase C-efficiency.
Keywords and subject areas
- Subject: Consumption taxes, Income and capital gains taxes, Revenue administration, Revenue performance assessment, Tax efficiency, Taxes, Value-added tax
- Keywords: Base broadening, C-efficiency, Consumption taxes, Economic growth, Global, growth effect, Income and capital gains taxes, personal income, rate differentiation, real GDP, Standard rate, Tax efficiency, tax revenue, Value-added tax, VAT, VAT base, VAT component, VAT revenue, VAT share, WP
Source: The Value Added Tax and Growth: Design Matters, Santiago Acosta Ormaechea and Atsuyoshi Morozumi, May 7, 2019 — IMF Working Papers 2019, 096.
Content in this bundle
- Working Paper