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This paper undertakes a cross-country analysis of the determinants of VAT compliance, using data from a sample of 17 OECD countries for 1987. An index of compliance is constructed and regressed against variables which represent characteristics of the countries and their VAT rates. It is found that (a) a higher VAT rate is associated with lower compliance, and this tradeoff limits the revenue-maximizing VAT rate to under 25%; (b) compliance is substantially lower with multiple VAT rates; and (c) an extra dollar spent on administration raises revenue by 12, and longer experience with administering a VAT also raises compliance. Several OECD countries are ranged along a frontier, collecting about 8% of GDP through a VAT, but with rates of 14% to 22% on bases between 60% and 40% of GDP. For these, the base could only be broadened if the tax rate were lowered. Copyright 1996 by MIT Press.
Agha et al. (Wed,) studied this question.
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