4 Gillis _et al._ 1990; Khalilzadeh-Shirazi _et al.,_ 1991) provided the theoretical basis for the following set of empiricaily testable hypotheses.

Gillis _et al_ (1990), in their survey of the VAT lessons, noted that VAT has developed a worldwide reputation as a governn,ents' ' money machine", as few other single tax instruments can mobilize as large revenue as a well designed and implemented VAT. The experiences of the 49 countries (see Table 1, appendix) show that, over the range of existing rates, with few exceptions, **-le** VAT revenue rises **with** the rate. Therefore, we posit a positive relationship between VAT rate (variable: RATE) and revenue.

The 'comprehensive" VAT is typically levied on a broad base which includes all goods and services (G+S). However, countries vary in their coverage of the base, particularly with regard to the treatment of services. The negative impact of extensive exemptions on. the size of the base can be quite dramatic. For instance, Kay and Davis (1990) estimate, on the b4 is of a survey of 32 countries, that the complete exemption of all services excludes from the VAT base between **45** to 78 percent of a country's GDP. This, in turn, increases the pressure on the fiscal authorities to use higher rate to mriobilize a target VAT revenue from a smaller base. Also, it is evident that some countries that use almost identical rates experience very different revenue performance. One source of different performances is often the size or the coverage of the base. We therefore define the BASE variable which captures whether a VAT is levied on all goods and services or on some subset of such comprehensive base. The underlying hypothesis is that the wider the base, the smaller is the number of goods and services exempted, and the larger the VAT revenue-to-GDP ratio. A simple dummy variable is used to measure differences in the size of the base. It assumes the value of one if the base comprises all goods and services (G+S), and zero otherwise<sup>9</sup> .

Tait (1988) pointed out that administrative and compliance costs rise dramatically as the number of VAT rates increase. Thus rate differentiation, through higher costs, may adversely affect revenue. Furthermore, single rate is almost always revenue superior to multiple rates with little rate dispersion. Therefore, when countries use more than one rate, rate dispersion tends to be substartial. Consequently, it may be that it is dispersion of rates, rather than the number of rates per se, that may adversely affect VAT revenue. To test this hypothesis we measure the absolute dispersion among countries' multiple VAT rates (variable RANGE), defined as the absolute difference between the highest and lowest VAT rate'°.

2/ The shortcoming is that the dummy variable does not capture the variance of less comprehensive bases, which can be quite wide. The ideal variable, for the construction of which our data are not adequate, would be the size of the base, as measure by a percent of GDP covered by the VAT base. A variable defined in this way would make it possible to estimate the relative revenue contributions of increases in VAT rates versus increases in the base through the expansion of base (i.e., elimination of existing exemptions).

1[/ We have also tried olher measures l^ dispersion including standard deviation. However, results were not satisfactory. Ozie reason c'J. ' that since standard deviation measures variation from a mean, in a small sample it may not display sufficient variation. However, when we simply used the number of VAT rates, instead of our RANGE variable, the results were very similar.