Value Added Tax Collection Efficiency and Economic Activity

Abstract

Objective: Revenue enhancement through improving the tax efficiency generates more income for the government without increasing the tax burden, and sustain economic growth. The objective of this study is to investigate the relationship between value added tax collection efficiency and growth. Theoretical Framework: Endogenous economic growth model allows for investigating the effects of fiscal policy on growth. In tax literature, indirect taxes are considered close to growth because they do not discourage saving and investment. The study decomposes the VAT revenues and use the VAT C efficiency to estimate the impact on growth. Method: The methodology adopted for this research is based on structural vector autoregressive SVAR. SVAR allows us to impose structural restrictions according to economic theory and to analyze the impact that an individual shock has on other variables included in the model. Results and Discussion: The study found that value added C -efficiency has a small and positive impact on growth, only in the short term. The maximum effect is in the third quarter, when one percentage point improvement in collection efficiency, increase the real per capita GDP, about 0.3 percent. Further improvements in collection efficiency are needed to generate more tax revenues and sustain growth. The study also found that total tax to GDP has a positive impact on growth, that is significant only in the short time. Government expenses have supported economic growth. An increase in government expenses as a percentage of GDP, is followed by an improvement in real per capita GDP with about 1.05 percent, average impact. Research Implications: The present research uses four fiscal variables, and only inflation rate based on GDP deflator as a control variable. Further research could be extended by including other control variables. Originality/Value: This study contributes to the tax literature in developing countries by estimating the impact of VAT on growth using C -efficiency ratio.