The Influence of Value Added Tax Revenue on Private Domestic Investment in Developing Countries

James Chindengwike

Journal of Global Economy, 2022, vol. 18, issue 4, 289-310

Abstract: The study's overarching goal is to assess the influence of Value Added Tax (VAT) revenue on private domestic investment in emerging countries. The study used a time series research design, and it is a case study of one country, Tanzania. Annual time series data from 1998 to 2020 were used in the study. The data on tax income (VAT) is taken from the Tanzania Revenue Authority website and the Bank of Tanzania, while the data on private domestic investment as Gross fixed capital formation of the private sector as a percentage of GDP is obtained from the World Bank. Following the first tests for heteroscedasticity, multi-collinearity, unit roots, lag length selection, and co-integrating vectors. The long-run and short-run correlations were then computed. The findings demonstrated that in the long run, value added tax is negatively associated to private domestic investment. The analysis showed a negative association between the degree of investment and the value added tax parameter estimates. Even though value added tax generates government revenue, increasing it encourages tax evasion and leads to high prices of goods, putting the burden on low-income earners, reducing disposable income and distorting saving and private domestic investment. The study recommends that governments reduce VAT rates, simplify their tax regimes, address any tax administrative issues, and plug all gaps for tax evasion in order to increase revenue generation and attract private investments. For example, the government should improve an appropriate tax system and implement progressive tax reforms to attract private investors. As the study's findings demonstrated that value added tax has a negative long-term impact on investment, a greater value added tax levied causes higher corporate costs. Governments must also lower VAT rates, simplify their tax regimes, address any tax administrative issues, and close any gaps for tax evasion in order to increase revenue generation and attract private investment. For example, the government should improve an appropriate tax system and implement progressive tax reforms to attract private investors. As the study's findings demonstrated that value added tax has a negative long-term impact on investment, a greater value added tax levied causes higher corporate costs.

Keywords: Value Added Tax; Tax Revenue; Private Domestic Investment; Tanzania (search for similar items in EconPapers)
JEL-codes: D8 I2 (search for similar items in EconPapers)
Date: 2022
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