The Collection Efficiency of the Value Added Tax: Theory and International Evidence

Joshua Aizenman and Yothin Jinjarak

No 11539, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax [VAT]. We consider the case where the collection efficiency is determined by the probability of audit and by the penalty on underpaying. Implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is impacted by political economy considerations greater polarization and political instability would reduce the efficiency of the tax collection. In addition, collection is impacted by structural factors affecting the ease of tax evasion, like the urbanization level, the share of agriculture, and trade openness. Defining the collection efficiency of the VAT as the ratio of the VAT revenue to aggregate consumption divided by the standard VAT rate, we evaluate the evidence on VAT collection efficiency in a panel of 44 countries over 1970-99. The results are consistent with the theory - a one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increase 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. In addition, a one standard deviation increase in GDP/Capita increases the tax efficiency by 8.1%. Qualitatively identical results apply for an alternative measure of VAT collection efficiency, defined by the ratio of VAT revenue to GDP divided by the standard VAT.

JEL-codes: F15 H21 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-pbe
Note: ITI PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Published as Joshua Aizenman & Yothin Jinjarak, 2008. "The collection efficiency of the Value Added Tax: Theory and international evidence," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 17(3), pages 391-410.

Downloads: (external link)
http://www.nber.org/papers/w11539.pdf (application/pdf)

Related works:
Working Paper: The collection efficiency of the value added tax: theory and international evidence (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:11539

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11539

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().