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The double dividend of a joint tariff and VAT reform: Evidence from Iran

Yousefi, K ; Sharif University of Technology | 2023

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  1. Type of Document: Article
  2. DOI: 10.1093/wber/lhad002
  3. Publisher: Oxford University Press , 2023
  4. Abstract:
  5. This paper provides empirical evidence on a novel complementarity between VAT and trade taxes. Downstream domestic firms require VAT receipts from importers to claim VAT on purchases, increasing incentives for honest reporting of imports. Trade gap, the difference between mirror and domestic trade reports in Iran at 6-digit HS disaggregation, is used to measure this complementarity. Iran introduced VAT in 2008 and, since then, has increased its rate from 3 to 9 percent. Difference-in-differences estimates show that a 1 percentage point increase in the VAT rate reduces the trade gap by about 2 percent. Consistent with the compliance mechanisms for VAT, a smaller effect for consumer products that have a shorter value chain is observed. Findings suggest that replacing tariffs with VAT results in a double dividend. Tax revenue might increase due to better tariff compliance and a broader VAT base. © The Author(s) 2023. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved
  6. Keywords:
  7. Chains effect ; Tariffs ; Tax compliance ; Trade liberalization ; Value added tax
  8. Source: World Bank Economic Review ; Volume 37, Issue 2 , 2023 , Pages 331-349 ; 02586770 (ISSN)
  9. URL: https://academic.oup.com/wber/article/37/2/331/7028408