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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)

Abstract

The value added tax (VAT) has been one of the most effective tools to increase tax collection in recent decades. In theory, the VAT has two advantages over other tax instruments: it ensures productive efficiency and maximizes revenue efficiency. These advantages have led more than 160 countries to adopt it, most of them in the last three decades. The importance of VAT has increased over time: it now generates 20% of tax revenue in OECD countries and more than 30% in low- and middle-income countries.

Despite its many advantages, VAT also has a number of limitations: it is a relatively complex tax for businesses to administer, it requires a high level of administrative capacity, and it is a regressive tax. Although these limitations are well known to tax authorities and the multilateral institutions that have promoted their adoption (in particular the International Monetary Fund), academic research has paid little attention to this tax, making it difficult to have an informed debate on its advantages and limitations in practice.

The main objective of this project is to identify general patterns in the performance of the VAT in countries at different levels of economic development. The baseline hypothesis is that the theoretical advantages of the VAT are substantially attenuated in low- and middle-income countries due to their governments’ lack of administrative capacity and to features of their economies such as the importance of the shadow economy and the large number of micro-enterprises.

To perform the analysis, we will use microdata from administrative VAT records from several countries with different levels of economic development (including Uganda, Ethiopia, Rwanda, Senegal, Pakistan, Costa Rica, Ecuador, and Mexico). To evaluate the productive efficiency of VAT, we will calculate indicators such as the percentage of companies below the size threshold from which registering in VAT is mandatory or the ratio between total sales declared in VAT and total consumption published in the National accounts. To evaluate collection efficiency, we will estimate indicators such as the degree of concentration of collection in a few companies or the ratio between total VAT collection and that obtained through the VAT on imports. We will also analyze microdata at the transaction level to estimate the degree of tax non-compliance by companies.

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