Research projects

The main goal of this project is to study the performance of the value-added tax (VAT) across countries at different stages of economic development, using detailed microdata from government sources. The VAT has, in theory, two advantages over alternative tax instruments: it ensures productive efficiency, and it maximizes revenue efficiency. The VAT also has a number of limitations, including high compliance costs for businesses, high administrative costs for the government, and its regressivity. Academic research has paid relatively little attention to the VAT, making it difficult to have an informed debate about its advantages and limitations in practice across different levels of economic development.

To study how the performance of the VAT in practice compares to the predictions in theory, we have collected micro-level administrative records from VAT returns for more than 10 low- and middle-income countries. The baseline hypothesis is that the theoretical advantages of the VAT are substantially attenuated in these countries due to their governments’ lack of administrative capacity and to features of their economies such as informality and the large number of micro-enterprises. We have identified and quantified some relevant patterns to are particularly acute in lower income countries: revenue is more concentrated in just a few large firms; the value chains are broken more frequently due to informality and evasion; and, finally, revenue authorities impose restrictions on VAT refunds to increase short-term tax revenues. All of these patterns imply that the VAT is more distortionary and less efficient at raising revenue than the theoretical model predicts, explaining why it has been less successful than in high-income countries.

The working paper resulting from this project is currently being presented at international conferences and seminars to receive feedback from experts in this field. We plan to submit the final paper to a top general-interest economics journal for publication.