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DOES A VALUE‐ADDED TAX INCREASE ECONOMIC EFFICIENCY?
Author(s) -
Adhikari Bibek
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12847
Subject(s) - economics , value added tax , value (mathematics) , econometrics , public economics , microeconomics , macroeconomics , mathematics , statistics
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)

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