Effects of Value Add Tax on Consumption in Developing Countries

Abstract

The most widespread economic problem today seems to be an abrupt decline in GDP and deep recession. Consumption is one of the most important elements constituting GDP, whose growth leads to GDP growth and thus the economic growth. In this study, the effect of value added tax on consumption has been examined especially on the developing countries. In details, the effects of VAT on the consumption of 19 developing countries for duration of 1995 to 2010 were investigated. At first, VAT was incorporated the consumption function and its impact on the consumption and consequently the saving was explored because consumption and saving are interrelated. For analysing the data, the GMM panel was employed because of the structure of the model. The results revealed that VAT, with a lag, influences the consumption negatively while this finding is consistent with the research literature background as well as Duesenberry theory and the consumers' consumption habits.

Modelling Tax-Consumption Relationship: An Empirical Evidence from Asia

“…Furthermore, the t-statistic value is sufficiently high at 13/14 2.87 which suggests that the tax has a highly significant and negative influence on consumption. This finding is parallel to findings of Romer and Romer (2010), Burge and Rogers (2011), Alm and Ganainy (2012), Bartkus (2017), Varlamova and Larionova (2015), Leka (2015), Strilkova and Siroky (2015), Baker and Kueng (2016), and Kolahi et al (2016), who propose a negative impact of tax on the household consumption expenditure. The study's finding is in line with absolute income hypothesis's proposition that an increase in tax results in a reduction of income and household consumption expenditure.…”

“…In contrast to above studies, Romer and Romer (2010), Alm and Ganainy (2012), Tamasauskiene and Opulskyte (2012), Varlamova and Larionova (2015), Strilkova and Siroky (2015), Baker and Kueng (2016), Kolahi et al (2016), and Bartkus (2017) who apply panel data estimation approach argue negative relationships between tax and consumption expenditure of household. Applying the panel OLS to analyse the sample countries from OECD, Varlamova and Larionova (2015) revealed negative relationship between taxes and household expenditure.…”

“…Applying the panel OLS to analyse the sample countries from OECD, Varlamova and Larionova (2015) revealed negative relationship between taxes and household expenditure. Subsequently, by extending the panel estimation to dynamic panel data based on generalized method of moments (GMM) system estimators to different countries set, Alm and Ganainy (2012) and Kolahi et al (2016) confirm that VAT (value added tax) has a significant negative effect on consumption. An increased VAT would result in a reduction of consumption.…”

“…Some of the studies were highlighted by Ajibola and Segun (2017), Leka (2015), and Eusebio and Franchesca (2013) who suggested a positive impact of tax on households' consumption expenditure. Other group of researchers namely Varlamova and Larionova (2015), Tamasauskiene and Opulskyte (2012), Baker and Kueng (2016), and Kolahi et al (2016) emphasised on negative relationships between tax and consumption expenditure. These mixed 9/14 results suggested the need to reinvestigate the issue of tax-consumption relationship in order to suggest appropriate policy implication to the policy makers.…”