Does the Value-Added Tax Add Value? Lessons Using Administrative Data from a Diverse Set of Countries
AbstractThe value-added tax (VAT) is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue. Yet, in many countries there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose its desirable properties. We draw on firm-level administrative VAT records from 11 countries at different income levels to examine the functioning of real-world VAT systems. We document four stylized facts that capture departures from the textbook VAT model which are particularly pronounced in lower-income countries. We discuss the effects on VAT performance and simulate a counterfactual retail sales tax and a turnover tax. Despite its shortcomings, we conclude that the real-world VAT is superior to the alternatives.
CitationBrockmeyer, Anne ⓡ Giulia Mascagni ⓡ Vedanth Nair ⓡ Mazhar Waseem ⓡ Miguel Almunia. 2024. "Does the Value-Added Tax Add Value? Lessons Using Administrative Data from a Diverse Set of Countries." Journal of Economic Perspectives, 38 (1): 107-32. DOI: 10.1257/jep.38.1.107
- H22 Taxation and Subsidies: Incidence
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- L25 Firm Performance: Size, Diversification, and Scope
- O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O23 Fiscal and Monetary Policy in Development