ADOPTING A VALUE-ADDED TAX IN A DEVELOPING COUNTRY*

There are many decisions points to consider once a government has decided to put in place a value added tax. Some of these decisions pre-determine other decisions. In particular, most countries have chosen this VAT to be most suitable: consumption type of VAT designed along the destination principle, and collected by the credit method. Other features tend to be more variable depending on the countries concerned. Most countries would want to adopt the comprehensive VAT, down to the retail level, but practical considerations would necessitate the introduction only of the pre-retail VAT. The VAT may have a narrower coverage of sectors because of the limitations related to special conditions of small establishments, especially in developing countries and because of the stage of economic activity covered. When these are taken into account, through the technique of exemption, the VAT would tend to be applicable to the more formal sector of the economy that is composed of larger establishments. The simplest VAT would be conceived with a single rate, but intermediate rates may be introduced to accommodate the need to meet social considerations on the burden of the tax. Finally, although this paper dealt with the issues about the introduction of a VAT, the same issues would loom large in any improvements designed to broaden the coverage of an existing VAT. It is likely that the most basic choices will have to be committed at the point of introduction. In that respect, there is some irreversibility in the choice of the type of VAT, the principle upon which it is based, and the method of collecting it. Room for improvement will take place essentially in the coverage of the tax. For instance, this can be in terms of the following: movement towards the comprehensive VAT, in the case of a decision in favor of a pre-retail level VAT; increase in the coverage of sectors where before the horizontal coverage is narrow; and changes in the level of the tax rate.     

Personal Income Taxes in Developing Countries

Comparative work on income taxes in developing countries hascommonly looked at average tax rates. These rates are oftenconstructed by dividing revenue collections by some measureof private or personal income. Recent controversies have, however,focused on the incentive effects of marginal tax rates. Thisarticle develops and applies a simple methodology to comparemarginal official tax rates across a sample of fifty developingcountries. As would be expected given differences in fiscalcapacity, the poorest and the lower-middle-income countriesimpose relatively low marginal rates, and the rates for theupper-middle-income and developed countries are higher. Conversely,several low-and lower-middle-income countries' tax thresholdsstart at income levels which are low relative to their meanincome when compared with those of developed countries. Theresults warn against trying to derive information on the disincentiveeffect of a country's tax schedule from the highest marginalrate; our data show that this is not an accurate indicator ofoverall disincentive effects.