2 determinants' has been one issue of special relevance for fiscal authorities. The emerging conventional wisdom, based largely on practice and numerous country case studies, suggests that a single rate VAT (with the rate between 10 and 20 percent), with very few exemptions and, therefore, a broad base is superior to a VAT with multiple rates and many exemptions which reduce its base and complicate administration'. With more quantitative data on VAT now available, there is consiWlerable scrpe for empirical research on VAT, both in comparat,ve and cross-sectional studies.

The objective of this paper is to examine the main determinants of the VAT revenue in a simple cross-country framework. Specifically, we seek to answer the following three questions. First, what empirical relationship is emerging from the existing data on VAT revenue and **VAT rates** for single VAT rate countries, and how much, on average, a one percent VAT increase in the rate can be expected to raise VAT revenue, as measured by a VAT-to-GDP ratio? Second, what are the key determinants of VAT revenue emerging from a cross-country analysis of the full sample of countries (those using single rate and those that practice multiple VAT rates)? And third, is there a statistically significant difference regarding the VAT revenue performance between single VAT rate coun'ries and countries that adopted multiple VAT rates? It is hoped that answers to these questions can provide firmer quantitative background for policy prescriptions regarding VAT. Also, robust estimates of the VAT revenue may provide guidance on revenue potential to policymakers in countries which are currently planning to introduce a VAT.

The structure of the paper is as follows. Section II provides a brief, stylized overview of existing VAT rate structures, revenue performances and tax bases. The empirical methodology and the estimated models are presented and discussed in section III. Section IV contains concluding remarks and policy implications.

# **II. VAT Rates, Base and** Revenue Performance: Some Stylized Facts

An inspection of a sample of 49 countries on which we were able to collect various data on VAT revenues, rates and bases reveals at least five interesting stylized facts about the **VAT**<sup>**6**</sup> **.** First, a worldwide average VAT rate of 14.4 percent generates 5.1 percent of GDP implying the average revenue productivity ratio<sup>7</sup> of 0.35 percent of GDP: each one percentage point of VAT 4/ Apart from the good revenue potential, neutrality and efficiency are also the reasons for superiority of this tax in contrast to other common tax instruments such as a turnover tax.

# I/ See World Bank (1991).

6/ See table I in the appendix.

7/ See Tanzi (1993) p.18, table 1, which defines revenue productivity as the ratio between the VAT revenue and VAT rate. In that paper, Tanzi quotes Silvani's data on 22 single VAT rate countries with average revenue-to-GDP ratio of 4.3 percent, average rate of 11.6 percent, and the implied revenue productivity ratio of 0.37. Our sample extends Silvani's data to include countries with multiple VAT rates, resulting in somewhat lower overall revenue productivity ratio.