Abstract
The paper attempts to elaborate on the revenue-raising capabilities (economic efficiency and viability) of a value-added tax (VAT) system, particularly in developing countries. The analysis concentrates on the effect of a VAT on tax revenues raised, and the main objective is to determine whether a VAT system generates greater benefits than previously utilised sales taxes, i.e. pre-existing sales taxes (PEST). Using a panel data regression analysis, our results indicate that while all countries gain revenue from the presence of VAT, it is significantly more in developed countries, although the dummy VAT variable interacted with trace openness enters positively for the lower- and upper middle-income groups. This proves the importance of trade for VAT revenues, but also that VAT combined with interaction variables is conducive to higher tax revenues.
Highlights
Markets and financial institutions in developing countries are often highly unorganised, spatially fragmented and determined by external forces
Existing empirical evidence has shown that the share of value-added tax (VAT) revenues in GDP exceeds that of the pre-existing sales taxes (PEST) in developing countries
As studies show that GDP per capita and international trade have an impact on the ratio of tax revenue to GDP, these factors, together with the dummy and interaction variables, are taken into account in the regression analysis
Summary
Markets and financial institutions in developing countries are often highly unorganised, spatially fragmented and determined by external forces. Fiscal measures are the only means to mobilise domestic resources (Todaro, 1992). In this respect, developing countries are highly dependent on the amount of tax revenue collected, especially indirect taxes, which are a major source of revenue (51.9 per cent). This paper attempts to elaborate on the revenue-raising capability (productivity) of a VAT system, via an extensive analysis of the economic efficiency and the viability of such a system. Our analysis concentrates on the effect of a VAT on tax revenues raised, and the main objective is to determine whether a VAT system generates greater benefits than previously utilised sales taxes, i.e. pre-existing sales taxes (PEST). In order to make this determination, the study: (a) reviews relevant literature and existing empirical studies; (b) conducts a panel data regression analysis and compares data before and after the introduction of the VAT; and (c) provides conclusions and appropriate policy suggestions
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