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The Perfect Tax? A Review of the Performance of the VAT with an International Perspective

19th National Competition for Economic Research Grants

Applied Economics

Senior Researcher : Miguel Almunia Candela

Research Centre or Institution : Colegio Universitario de Estudios Financieros (CUNEF)


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 VAT performance compares in practice with theoretical predictions, we have collected micro-level administrative records of VAT returns from 11 countries, which have a combined population of 500 million people and per capita income levels between $500 and $45,000 annually: Costa Rica, Eswatini, Ethiopia, France, Guatemala, Honduras, Hungary, Pakistan, Senegal, and Uganda.

The results indicate that the theoretical advantages of the VAT are attenuated in low-income countries due to the lack of administrative capacity of their governments and to characteristics of their economies such as informality and the large number of micro-enterprises. We have identified and quantified four stylized facts: tax revenue is highly concentrated in a few large companies; the average effective tax rate varies widely among companies of different sizes; value chains are more frequently broken due to informality and evasion; and tax authorities place restrictions on VAT refunds to increase tax revenue in the short term. All these patterns imply that the VAT is more distortionary and less efficient than the theoretical model predicts, which explains why it performs less well in low-income countries.


Scientific Production
Magazine Articles -
Communications at national conferences 1
Communications at international conferences 2


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