The collection efficiency of the Value Added Tax: Theory and international evidence

Joshua Aizenman, Yothin Jinjarak

Research output: Contribution to journalArticlepeer-review

52 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)391-410
Number of pages20
JournalJournal of International Trade and Economic Development
Volume17
Issue number3
DOIs
StatePublished - 1 Sep 2008
Externally publishedYes

Keywords

  • Political instability
  • Tax collection costs
  • Trade openness
  • Urbanization
  • VAT

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Aerospace Engineering

Fingerprint

Dive into the research topics of 'The collection efficiency of the Value Added Tax: Theory and international evidence'. Together they form a unique fingerprint.

Cite this