Tax transition in developing countries: Do VAT and excises really work?

This paper investigates the role of Value Added Tax (VAT) and excises as first wave tax transition tools in developing countries. Focusing on a sample of 96 developing countries over the period 1985-2013, we investigate whether the adoption of VAT enable developing countries to increase the likelihood of succeeding tax transition. Results indicate that having a VAT, allow developing countries to increase the probability of succeeding tax transition by near 10%. We further investigate the extent to which VAT and excises offset trade tax revenue losses of trade liberalization in these countries. Our estimates reveal that VAT is offsetting by 67% trade tax revenue losses in developing countries with an U relationship, while this effect holds for excises duties with an U inverted relationship. The study also points out heterogeneities (while VAT tax transition effect is robust to African and Asian countries, it seems not for Latin American countries), as well as asymmetries (the revenue collection of VAT and excises didn’t increase the period over which developing countries face an increase in trade tax). Overall, the study concludes that, first wave tax transition even strengthened by these instruments, seems not irreversible. It suggests to take with more close attention VAT and excises as performant first wave tax transition tools in developing countries.