The Value Added Tax and Growth: Design Matters

By Santiago Acosta Ormaechea, Atsuyoshi Morozumi

May 7, 2019

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Santiago Acosta Ormaechea, and Atsuyoshi Morozumi. The Value Added Tax and Growth: Design Matters, (USA: International Monetary Fund, 2019) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Does the design of a tax matter for growth? Assembling a novel dataset for 30 OECD countries over the 1970-2016 period, this paper examines whether the value added tax (VAT) may have different effects on long-run growth depending on whether it is raised through the standard rate or through C-efficiency (a measure of the departure of the VAT from a perfectly enforced tax levied at a single rate on all consumption). Our key findings are twofold. First, for a given total tax revenue, a rise in the VAT, financed by a fall in income taxes, promotes growth only when the VAT is raised through C-efficiency. Second, for a given VAT revenue, a rise in Cefficiency, offset by a fall in the standard rate, also promotes growth. The implication is thus that in OECD countries broadening the VAT base through fewer reduced rates and exemptions is more conducive to higher long-run growth than a rise in the standard rate.

Subject: Consumption taxes, Income and capital gains taxes, Revenue administration, Revenue performance assessment, Tax efficiency, Taxes, Value-added tax

Keywords: Base broadening, C-efficiency, Consumption taxes, Economic growth, Global, Growth effect, Income and capital gains taxes, Personal income, Rate differentiation, Real GDP, Standard rate, Tax efficiency, Tax revenue, Value-added tax, VAT, VAT base, VAT component, VAT revenue, VAT share, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/096
Stock No:

WPIEA2019096
ISBN:

9781498312233
ISSN:

1018-5941

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