Does VAT reduce the instability of tax revenues?

Abstract

In this study, we examine whether or not the adoption of value-added tax (VAT) in developing countries is an effective way of stabilising tax revenues. Using a large panel of 103 developing countries observed over 1980-2008 and several alternative estimation methods in order to deal with the self-selection bias and the endogeneity issue inherent in VAT adoption, we found robust evidence that the presence of VAT leads to significantly lower tax revenue instability. On average, countries with VAT experience 40-50% less tax revenue instability than countries which do not have a VAT system. These effects decrease with the level of economic development and the openness of trade.Tax Instability, Value Added Tax, Macroeconomic Fluctuations