The Effects of Value Added Tax (VAT) on the Rate of Government Growth: An OECD Panel Study

Value added tax (VAT) has been a handy instrument, particularly in the financing of European governments during the last quarter of the twentieth century, when their expenditures were rising rapidly. This suggested to many that there could be an association between the share of VAT revenues in total government revenues and the rate of government growth. This paper investigates the effects of VAT on government growth using ordinary least squares with panel corrected standard errors for OECD countries. The results strongly suggest that unlike “cascading type of turnover taxes”, VAT does not increase the rate of government growth, rather, it can account for current slowdowns in government growth rates for OECD countries.