International Tax and Public Finance

, Volume 20, Issue 1, pp 105-128

First online:

Value-added taxation and consumption

  • James AlmAffiliated withDepartment of Economics, Tulane University Email author 
  • , Asmaa El-GanainyAffiliated withInternational Monetary Fund

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One of the main rationales for taxing consumption rather than income is that it is believed that consumption taxes discourage consumption, encourage savings, and thus generate higher economic growth. However, empirical evidence on the actual effectiveness of consumption taxes in stimulating savings is very limited. In this paper, we estimate the impact of a broad-based consumption tax, the value-added tax (VAT), on the aggregate consumption of fifteen European Union countries over the period 1961–2005. Our empirical results indicate, across a variety of estimation methods and specifications, that a one percentage point increase in the VAT rate leads to roughly a one percent reduction in the level of aggregate consumption in the short run and to a somewhat larger reduction in the long run.


Value-added taxation Consumption taxation Savings Economic growth Generalized methods of moments estimation

JEL Classification

H20 H25 H31