Is value-added tax a moneymaking-machine for developing economies? Evidence from Ghana

Abstract

Value-added tax (VAT) became a tax of choice recommended by the Breton Wood Institutions to boost tax revenue shares in developing countries. However, after several decades of VAT implementation globally, empirical evidence on its revenue effects is still inconclusive. The key question in this paper is: has the adoption of value-added tax (VAT) really made Ghana’s tax revenue mobilisation better off? This paper employs both the Fully Modified OLS and Autoregressive Distributed Lag (ARDL) approaches to test the moneymaking hypothesis for Ghana’s VAT. On the whole, the study fails to uphold the view that the VAT is a money-machine for Ghana. This implies that its adoption has not really brought about any dramatic improvement in aggregate tax shares. The study therefore recommends a reduction in the over concentration on VAT. An appropriate balance of tax-mix is therefore recommended.

JEL classification: H25, E62, O23

Keywords: value-added tax, fiscal policy, government revenue, development policy