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The Value-Added Tax: Its Causes and Consequences

The Value-Added Tax: Its Causes and Consequences by Ben Lockwood
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Has the VAT proved, as its proponents claim, an especially effective form of taxation? To address this, this paper first shows that a tax innovation-such as the introduction of a VAT- reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This leads to the estimation, on a large panel, of a system of equations describing the probability of VAT adoption and the revenue impact of the VAT. The sign of the revenue impact is generally ambiguous, but most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so.
International Monetary Fund; July 2007
36 pages; ISBN 9781452726908
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Title: The Value-Added Tax: Its Causes and Consequences
Author: Ben Lockwood; Michael Keen