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Does A Value‐Added Tax Increase Economic Efficiency?

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  • Bibek Adhikari

Abstract

Theory predicts that a value‐added tax (VAT) is an efficient tax system, which is one of the primary reasons for its rapid adoption worldwide. However, there is little empirical evidence supporting this prediction, especially for developing countries. I estimate the efficiency gains of introducing a VAT using the synthetic control method. I find that a VAT has, on average, positive and economically meaningful impact on economic efficiency. This result, however, is driven by richer countries only. There is no significant impact of the VAT on poorer countries. The findings are robust across a series of placebo studies and sensitivity checks. (JEL H20, H25, O40, E6)

Suggested Citation

  • Bibek Adhikari, 2020. "Does A Value‐Added Tax Increase Economic Efficiency?," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 496-517, January.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:1:p:496-517
    DOI: 10.1111/ecin.12847
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    Cited by:

    1. Siti Norwahida Shukeri & Faisal D Alfordy, 2021. "Valued Added Tax (VAT) Impact on Economic and Societal Well-Beings (Pre-and Post COVID19): A Perception Study From Saudi Arabia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(1), pages 92-100, January.

    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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