Effects of Value Add Tax on Consumption in Developing Countries

Abstract

The most widespread economic problem today seems to be an abrupt decline in GDP and deep recession. Consumption is one of the most important elements constituting GDP, whose growth leads to GDP growth and thus the economic growth. In this study, the effect of value added tax on consumption has been examined especially on the developing countries. In details, the effects of VAT on the consumption of 19 developing countries for duration of 1995 to 2010 were investigated. At first, VAT was incorporated the consumption function and its impact on the consumption and consequently the saving was explored because consumption and saving are interrelated. For analysing the data, the GMM panel was employed because of the structure of the model. The results revealed that VAT, with a lag, influences the consumption negatively while this finding is consistent with the research literature background as well as Duesenberry theory and the consumers’ consumption habits.