Value-added Taxes in the 21st Century
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The border adjustment tax, an extremely close cousin of the VAT, has been one policy discussed by Congressional Republicans as a part of potential tax reform. Various forms of the VAT have been included in numerous political platforms, such as that of the unsuccessful presidential campaign of Ted Cruz. In theory, a VAT collects more revenue than a sales tax and encourages investment. Using a probit model for the VAT adoption question, and an OLS-estimated linear regression model for the revenue and investment questions, my findings included: Larger, more agricultural countries with younger populations are less likely to adopt a VAT. However, as countries open more to trade, it is more probable that they will adopt this tax. The results of the smaller, balanced panel suggest that for a certain subset of countries, presence of a VAT could lead to an increase of revenue relative to GDP by about 2 percentage points. There is not conclusive evidence that the presence alone of a VAT promotes investment. However, surprisingly, increased openness to trade and lower GDP per capita (not two factors normally associated with each other) both seem to make it more difficult to see investment gains from a VAT.