Appropriateness and Effectiveness of Tax Regime the Case of Vat Diffusion

This paper examines the appropriateness of VAT as an economic institution and finds that the effect of VAT adoption on tax capacity depends on its appropriateness to the adopting country. Following the literature that reveal the VAT diffusion is primarily driven by countries’ geographic distance, we propose a method to measure the appropriateness of VAT based on a spatial regression model by assuming that VAT diffusion is jointly determined by the countries’ geography and socio-economic conditions. Our results suggest that countries with higher appropriateness index have a more significant increase in tax capacity after the introduction of VAT