International Tax and Public Finance

, Volume 20, Issue 1, pp 105–128 | Cite as

Value-added taxation and consumption

Article

Abstract

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.

Keywords

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

JEL Classification

H20 H25 H31 

Notes

Acknowledgements

The views expressed here are those of the authors, and should not be interpreted as those of Tulane University or of the International Monetary Fund and its Board. We are grateful to the Editor and to an anonymous referee for helpful comments.

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Department of EconomicsTulane UniversityNew OrleansUSA
  2. 2.International Monetary FundWashingtonUSA

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