Tax transition in developing countries : do value added tax and excises really work ?

This paper investigates the role of Value Added Tax (VAT) and excises in first wave tax transition (movement away from international trade taxes towards domestic revenue collection) of developing countries. Focusing on a sample of 96 developing countries over the period 1985-2013, we investigate whether the adoption of VAT enables developing countries to increase the thelikelihood of succeeding tax transition. Results indicate that having a VAT, allows developingcountries to increase the probability of succeeding tax transition by 12%. We further investigatethe extent to which VAT and excises offset trade tax revenue losses of trade liberalization inthese countries. Our estimates reveal that VAT is offsetting for about 52% trade tax revenuelosses in developing countries with a U relationship, while this effect holds for excises dutieswith a U inverted relationship. The study also points out heterogeneities (while VAT adoptiontax transition effect is robust to African and Asian countries, it seems not for Latin Americancountries), as well as asymmetries (the revenue collection of VAT and excises didn't increase theperiod over which developing countries face an increase in trade tax). While enhancing tax ad-ministration fosters the transition process in these countries, the study however suggests takingwith closer attention VAT and excises as powerful first wave tax transition tools in developingcountries.