The collection efficiency of the Value Added Tax: Theory and international evidence

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Main author: Jinjarak, Yothin
Format: Journal Article           
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id eprints-8747
recordtype eprints
institution SOAS, University of London
collection SOAS Research Online
language English
language_search English
description This paper evaluates the political economy and structural factors explaining the collection efficiency of the Value Added Tax (VAT), where the collection efficiency is determined by the probability of audit and by the penalty on underpaying, and implementation lags imply that the present policy maker determines the efficiency of the tax system next period. Theory suggests that the collection efficiency is affected by political economy considerations - greater polarization and political instability would reduce the efficiency of the tax collection, and collection is impacted by structural factors affecting the ease of tax evasion (such as urbanization, agriculture share, openness). We evaluate the VAT collection efficiency (VAT revenue over the aggregate consumption divided by the standard VAT rate) in a panel of 44 countries over 1970-99. A one standard deviation increase in durability of political regime, and in the ease and fluidity of political participation, increases 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. Qualitatively identical results apply for the ratio of VAT revenue to GDP divided by the standard VAT.
format Journal Article
author Jinjarak, Yothin
author_facet Jinjarak, Yothin
authorStr Jinjarak, Yothin
author_letter Jinjarak, Yothin
title The collection efficiency of the Value Added Tax: Theory and international evidence
publisher Taylor and Francis
publishDate 2008
url https://eprints.soas.ac.uk/8747/

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