TY - JOUR
T1 - The collection efficiency of the Value Added Tax
T2 - Theory and international evidence
AU - Aizenman, Joshua
AU - Jinjarak, Yothin
N1 - Funding Information:
The authors would like to thank Tuan Minh Le and the participants at the Public Finance World Bank Workshop and the NTU economic growth seminar for useful comments. Joshua Aizenman gratefully acknowledges the support of a COR grant, UCSC. Any views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.
PY - 2008/9/1
Y1 - 2008/9/1
N2 - This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax (VAT), where the collection efficiency is determined by the probability of audit and by the penalty on underpaying, and implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is affected by political economy considerations - greater polarization and political instability would reduce the efficiency of the tax collection, and collection is impacted by structural factors affecting the ease of tax evasion (such as urbanization, agriculture share, openness). We evaluate the VAT collection efficiency (VAT revenue over the aggregate consumption divided by the standard VAT rate) in a panel of 44 countries over 1970-99. A one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increases the VAT collection efficiency by 3.1% and 3.6%, respectively. A one standard deviation increase in urbanization, trade openness and the share of agriculture, changes the VAT collection efficiency by 12.7%, 3.9% and -4.8%, respectively. Qualitatively identical results apply for the ratio of VAT revenue to GDP divided by the standard VAT.
AB - This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax (VAT), where the collection efficiency is determined by the probability of audit and by the penalty on underpaying, and implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is affected by political economy considerations - greater polarization and political instability would reduce the efficiency of the tax collection, and collection is impacted by structural factors affecting the ease of tax evasion (such as urbanization, agriculture share, openness). We evaluate the VAT collection efficiency (VAT revenue over the aggregate consumption divided by the standard VAT rate) in a panel of 44 countries over 1970-99. A one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increases the VAT collection efficiency by 3.1% and 3.6%, respectively. A one standard deviation increase in urbanization, trade openness and the share of agriculture, changes the VAT collection efficiency by 12.7%, 3.9% and -4.8%, respectively. Qualitatively identical results apply for the ratio of VAT revenue to GDP divided by the standard VAT.
KW - Political instability
KW - Tax collection costs
KW - Trade openness
KW - Urbanization
KW - VAT
UR - http://www.scopus.com/inward/record.url?scp=47649097723&partnerID=8YFLogxK
U2 - 10.1080/09638190802137059
DO - 10.1080/09638190802137059
M3 - Article
AN - SCOPUS:47649097723
SN - 0963-8199
VL - 17
SP - 391
EP - 410
JO - Journal of International Trade and Economic Development
JF - Journal of International Trade and Economic Development
IS - 3
ER -