79
4, XXI, 2018
Economics
DOI: 10.15240/ ul/001/2018-4-006
In oduc ion
Rising income inequali y is a g owing conce n
o go e nmen s due o i s ad e se e ec on
he po e y le el, income dis ibu ion, social
and ins i u ional s abili y, which in u n impede
he economic g ow h and may lead o poli ical
ins abili y. Taxa ion has long been ega ded as
he key ins umen in a i scal policy o educe
income inequali y ia he edis ibu ion o
ax e enues o i nance public goods and o
co ec o ma ke -income inequali y (A kinson,
1991). Al hough p io s udies ha e ex ensi ely
in es iga ed he e ec o axa ion on income
inequali y (Ma inez-Vazquez e al., 2012),
he i ndings a e inconclusi e especially in
de eloping coun ies (Bi d & Zol , 2014).
The ine ec i e edis ibu ion ole o axa ion
in de eloping coun ies is mainly due o
i scal co up ion and ax e asion ha dis o
he dis ibu ion p ocess (Richupan, 1984).
Consequen ly, a high pe cen age o axes
emain uncollec ed; hence, he alue added
ax (VAT) sys em becomes he mos popula
ool o inc ease i scal e enues in de eloping
economies.
Ne e heless he use o VAT o educe
income inequali y is deba able due o i s
eg essi e na u e. This is because lowe
income ea ne s pay la ge pe cen age o hei
income on consump ion o good and se ices
as compa ed o highe income ea ne s (Tai ,
1991). Consequen ly, empi ical e idences
ound ha VAT widens income inequali y (see
Leahy e al., 2011; Ma inez-Vazquez e al.,
2012). Despi e o his eason, VAT gene a es
a subs an ial po ion o ax e enue in nea ly 130
coun ies (Keen & Min z, 2004) and a qua e
o he wo ld’s ax e enue (Bye e al., 2012).
Besides, VAT is also ound o educe income
inequali y in de eloped coun ies (Bye e al.,
2012). This becomes an open deba e on he
implemen a ion o VAT because dis o iona y
collec ion o axes a ec s economic g ow h
ad e sely (Na ayanan, 2014); hence, coun ies
a ound he globe ha e eso ed o e o m hei
ax policy by implemen ing he VAT sys em.
The e o e, his s udy seeks o examine he
impac o VAT on income inequali y so as
o es ablish he iabili y o such policy in
educing he income inequali y as claimed by
he poli icians and p io empi ical s udies. This
s udy p o ides an insigh o he policy make s
on he easibili y o he VAT sys em o achie e
a be e income dis ibu ion han he adi ional
pe sonal income ax and co po a e ax sys ems.
In addi ion, he coun y go e nance had
been widely documen ed as a key con ibu o o
he success ul implemen a ion o VAT (La Po a
e al., 1999). Economis s ag ee ha go e nance
is a c i ical ac o in explaining he pe o mance
a ia ions ac oss di e en coun ies because i
a ec s esou ces alloca ion. The e o e, good
go e nance con ibu es o a good ax sys em,
which is i al o ax dis ibu ion p ocess o
educe income inequali y. In addi ion, he ax
s uc u e is highly esponsi e o a go e nance
s uc u e ha enhances he collec ion o ax o
be dis ibu ed o he p oduc i e sec o s, as Bi d
and Zol (2008) sugges ed.
We u he in es iga e he impac o
VAT on income inequali y in de eloped and
de eloping coun ies by adding he ole o
coun y go e nance in ou esea ch model.
We spli he sample in o de eloped and
de eloping coun ies. We a gue ha a ying
le el o economic de elopmen con ibu es
o he di e en ial impac s o VAT on income
inequali y. To he bes o ou knowledge his is
he i s a emp o examine he e ec o coun y
go e nance on he link be ween VAT and income
inequali y. Ou esea ch ocuses on coun ies
wi h VAT sys em o de e mine he go e nance
ac o s ha could imp o e he link be ween
VAT and income inequali y. In doing so, ou
THE ROLE OF COUNTRY GOVERNANCE ON
VALUE-ADDED TAX AND INEQUALITY
Sok-Gee Chan, Zulku l y Ramly
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80 2018, XXI, 4
Ekonomie
i ndings enhance he unde s anding o his link
among he policy make s and unde sco e he
impo ance o imp o ing he coun y go e nance
o ealize he posi i e e ec o he VAT on
income equali y. Ou i ndings p o ide insigh s
o be e policy implemen a ion by iden i ying
a se o go e nance ac o s ha con ibu e o
g ea e e i ciency and e ec i eness o VAT
as a ool o income dis ibu ion in di e en
en i onmen se ups (e.g., de eloped e sus
de eloping economies).
We seek o iden i y a sound ins i u ional
amewo k ha can be u ilized by go e nmen s
o mi iga e he de imen al e ec s o he VAT
sys em. We belie e ha he quali y o coun y
go e nance a ec he esou ce alloca ion
and income dis ibu ion because i se es as
an incen i e o he egula o s o implemen
policies ha a e bene i cial o he na ion.
We make an impo an con ibu ion o policy
implemen a ion wi h ega d o axa ion, in
pa icula , he VAT sys em despi e i s eg essi e
na u e and i s po en ial ha m ul e ec o he
economy. Ul ima ely, we in oduce a model
o he e ec i e implemen a ion o he VAT o
na ow income inequali y.
1. Li e a u e Re iew and Hypo hesis
De elopmen
1.1 VAT and Income Inequali y
VAT has been widely used since he 1960s
in mo e han 160 de eloped and de eloping
na ions. The use o VAT enhances he e i ciency
and e ec i eness o he o e all axa ion sys em
(Keen & Lockwood, 2010; Na ayanan, 2014) o
i nance socioeconomic de elopmen , i nance
bigge go e nmen , and educe ade de i ci s
(Mi chell, 2005). VAT is ound o inc ease he o al
ax e enue in bo h de eloped and de eloping
economies, o example in New Zealand VAT
p oduced 18% o he o al ax e enue (Hajek,
2001) and mo e han 50% in Slo ak Republic
(Banocio a, 2009). Ne e heless, he use o
VAT as a ool o e enue gene a ion is highly
deba able on he poli ical desk. The p oponen s
o VAT claim ha i is less damaging o he
coun y’s economy because i is cha ged a
a uni o m and ela i ely low a e. Fu he mo e,
VAT enables he go e nmen o gene a e mo e
e enue o i nance he coun y’s g ow h wi h
g ea e in es men in public in as uc u e,
educa ion, wel a e, heal hca e, and na ional
secu i y (Mi chell, 2005), which a e i al o
educe he inequali y in he economy. Yang and
Zhou (2011) ound ha unde aking ax e o m
by implemen ing an indi ec ax such as VAT
as he main ax sys em in China na owed he
gap be ween he u ban and u al income. This
is suppo ed by A i-Yonah (2014) on he use o
VAT o i nance mo e social p og ams in Ame ica
o educe he income inequali y.
Ne e heless, he impac o VAT is deba able
due o i s eg essi e na u e. Consequen ly, VAT
nega i ely a ec s income dis ibu ion because
he lowe income households spend a highe
pe cen age o hei income on VAT han he
high income households, hus widening he
income gap. Ba e and Wall (2006) ound
suppo o his asse ion in hei s udy o he
dis ibu ional impac o VAT om 2000 o 2004
in I eland. Leahy e al. (2011) also ound ha
lowe income households we e g ea ly a ec ed
by he VAT. In addi ion, Poble e (2010) obse ed
ha he po e y and income dis ibu ion in
Chile imp o ed and income ax inc eased a e
a cu in he VAT a e. Simila ly, Mussa (2014)
ound ha expanding he ze o a ing co e age
and exemp ion on ood, heal h and educa ion
con ibu ed o be e po e y educ ion and
na ows he income inequali y. This was
possibly due o he ac ha wi hou such c ucial
exemp ions he households om lowe income
g oup spend highe pe cen age o hei income
on VAT han highe income g oups.
H1: Highe VAT e enue inc eases income
inequali y.
1.2 The Mode a ing Role o Coun y
Go e nance
Coun y go e nance is an impo an elemen in
a aining an e ec i e and e i cien o mula ion
and implemen a ion o go e nmen policy,
pa icula ly in he edis ibu ion o ax
collec ions. Acco ding o Tanzi and Chu (1992),
a coun y wi h high g ow h a e may ail o
educe income inequali y due o he impai men
o he edis ibu i e go e nmen policy. P io
s udies ound ha coun ies wi h a high le el o
co up ion end o ha e lowe collec ion o ax
e enues. A high le el o co up ion educes he
s a e’s abili y o alloca e unds gene a ed om
ax collec ion o he be e men o he socie y
(Tanzi & D oodi, 1997) and causes signi i can
leakages in ax e enue (Ajaz & Ahmad, 2010).
S udies ha e obse ed ha ising co up ion
inc eases income inequali y in Asia (Li e al.,
2000), A ica (Kwabena, 2002), Middle Eas e n
coun ies (Imam & Jacobs, 2007), and a ious
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81
4, XXI, 2018
Economics
coun ies (Gup a e al., 2002). Meanwhile,
Adams and Klobodu (2016) ound ha con ol
o co up ion and highe anspa ency lowe ed
income inequali y in he Sub-Saha an A ican
coun ies.
Ins ead o ocusing on co up ion, we include
a ious measu es o coun y go e nance. E en
hough coun y go e nance is widely ecognized
as a ool o mo e e i cien and e ec i e ax
dis ibu ion o educe income inequali y, he
empi ical e idence is scan (E e es -Phillips
& Sandall, 2009). As La Po a e al. (1999)
sugges ed ha he quali y o go e nance is
i al in de e mining he success o go e nmen
pe o mance. Be e go e nance con ibu es
o economic s abili y and leads o highe
i nancial de elopmen , which in u n inc eases
ax esou ces (Ajaz & Ahmad, 2010). Besides,
Suma o e al. (2003) ound ha poo go e nance
ad e sely a ec ed he po e y educ ion e o s
o he Indonesian go e nmen . Muinelo-Gallo
and Mi anda (2014) and Ky iacou e al. (2017)
ound ha coun y go e nance is necessa y o
educe he income inequali y gi en he i scal
decen aliza ion. Simila ly, Chen and Kinkyo
(2016) also ound ha good go e nance is
a c i ical ac o o educe income inequali y. On
he o he hand, Ak am e al. (2011) obse ed
ha coun y go e nance was posi i ely ela ed o
po e y in he long un bu no in he sho un.
Thus, we o e ou second hypo hesis, as ollows:
H2: Highe VAT e enue educes income
inequali y in coun ies wi h highe quali y
go e nance.
2. Me hodology
2.1 Empi ical Model
We i s s udy he impac o alue-added ax on
income inequali y using he sys em Gene alized
Me hod o Momen s (GMM) as shown in
Equa ion (1), which is he base equa ion in ou
s udy. We de i ed he equa ion based on he
g ow h model.
i
VAT
i
Inequali y
i
Inequali y 

 2110

i
In es men
i
In la ion
i
CapGDP  54
/
3


i
Li e acy
i
FinDe
i
T ade  876

i
e
yea
C isisD
i
Go Exp  )(
19

(1)
Whe e i h e e s o he indi idual coun y and
is he ime pe iod in ol ed. Ou dependen
a iable is income inequali y (Inequali y),
measu ed by he Gini coe i cien . Income
inequali y e e s o dis ibu ion o money
income, which has implica ions o a na ion’s
economic heal h and policy. The Gini coe i cien
measu es he dispe sion o he income on
a scale be ween 0 and 1 whe e he coe i cien
o 1 indica es a pe ec income inequali y,
whe eas a lowe coe i cien indica es g ea e
income equali y.
The a iable o in e es in his s udy is
VAT, which is he a io o VAT collec ion o
go e nmen e enue. This a io is a subs i u e
o he VAT a e due o una ailabili y o he a e
in a ime-se ies manne . In addi ion, using he
a io o VAT collec ion o go e nmen e enue
enables us o assess he commi men o he
go e nmen owa ds he implemen a ion o
VAT as a ool o gene a e e enue o unding
he coun y economic de elopmen . We
p edic ha VAT is posi i ely ela ed o income
inequali y due o i s eg essi e na u e. Pu ing
i di e en ly, we hypo hesize ha highe VAT
e enue widens income inequali y.
We con ol o GDP pe capi a (GDP/Cap),
in l a ion (In l a ion), in es men (In es men ),
ade openness (T ade), i nancial de elopmen
(FinDe ), li e acy a e (Li e acy), and
go e nmen spending (Go Exp) which in l uence
income inequali y based on he endogenous
g ow h model. The eal GDP pe capi a wi h
he base yea o 2010 is he con ol a iable o
economic de elopmen . This is impo an o
c oss-coun y analysis as he di e en coun ies
a e cha ac e ized by di e en economic
de elopmen . Highe eal GDP pe capi a
e l ec s highe a e age disposable income pe
indi idual household, which lowe s he income
inequali y. In l a ion is a con ol a iable ha
cap u es he e ec o he mac oeconomic policy
en i onmen . An e ec i e mac oeconomic
policy makes an in l a iona y episode in he
coun y mo e s able and hence educes he
income inequali y. This is because in l a ion
leads o inc eases in p ices ha esul in
declines in eal income (Tanzi, 1977).
We also con ol o he e ec o in es men ,
which is measu ed by he a io o g oss capi al
o ma ion o GDP. A highe a io educes income
inequali y due o highe a e age p oduc i i y
among indi iduals. We also used ade
openness o e l ec he deg ee o exposu e
o an economy o ex e nal economic shocks.
Highe ade openness may inc ease o educe
income inequali y; i may also inc ease ade
i i
i i
i
i i
i i
i
i
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82 2018, XXI, 4
Ekonomie
in eg a ion o he coun y, which would inc ease
income inequali y (Milano ic & Squi e, 2007).
In addi ion, we employ i nancial de elopmen o
e l ec he deg ee o ma ke in eg a ion due o
dynamic globaliza ion and libe aliza ion.
The li e acy a e measu es he educa ion
le el o he indi iduals as well as human
capi al de elopmen o a coun y. Highe
educa ion le el educes income inequali y due
o he “comp ession” e ec (Knigh & Sabo ,
1983). Acco ding o Zhang (1996), a highe
educa ion le el enhances labo skills ha will
lead o an inc ease in a e age income and
he e o e na ows income inequali y. The a io
o go e nmen spending o GDP cons i u es
a majo sou ce o income dis ibu ion owa ds
he economic de elopmen and social wel a e.
E ec i e and e i cien go e nmen spending
on wel a e (educa ion and heal h) con ibu es
o highe human capi al de elopmen , which
inc eases he employmen oppo uni ies in he
economy (Sha i que & Haq, 2006) and, e en ually,
na owing income inequali y gap. Finally, i is
impo an o con ol o economic c ises (C isis)
because hey lead o ex e nal shocks ha hinde
economic de elopmen and dis o economic
policy implemen a ion. Also, economic c ises
inc ease he unemploymen a e due o he
slowdown in he demand o goods and se ices
and, hus, ul ima ely widen income inequali y.
Following In’ai a (2014) we use ini ial GDP
as he ins umen al a iable in ou es ima ion
o co ec o he endogenei y issues pe aining
o he GDP pe capi a, in l a ion, in es men and
ade. The economic condi ion and in es men
la gely depends on he coun y’s pe o mance.
Nex , we add he in e ac ion e ms be ween
coun y go e nance a iables and VAT, as
shown in Equa ion (2) o s udy he e ec o he
quali y o a coun y’s go e nance in imp o ing
ax collec ion e i ciency and educing income
inequali y in which Go i is he di e en ypes o
coun y go e nance ha we ob ained om he
In e na ional Coun y Risk G oup (ICRG).
(2)
Acco ding o Ak am e al. (2011), good
go e nance is bene i cial o educing po e y
and income inequali y because i minimizes
abuses o powe by he au ho i ies. This is
especially ue in de eloping coun ies whe e
ins i u ional p oblems a e he majo obs acles
in ax collec ion ha hinde he coun y’s
de elopmen (Ajaz & Ahmad, 2010). Bi d and
Zol (2008) o e ed suppo o his asse ion
when hey epo ed ha he ax s uc u e
and e i ciency a e highly esponsi e o he
coun y’s go e nance, which a ec s he abili y
o he economy o ul i ll social obliga ions.
Fu he mo e, good coun y go e nance is
e i cien in p o ec ing p i a e p ope y, able o
boos economic ac i i ies and mac oeconomic
s abili y and e ec i e in managing social
con l ic s o achie e sus ainable economic
g ow h. In his case, we expec α10 o educe
income inequali y and α11 is he pa ame e s o
be es ima e o he in e ac ion e ms o coun y
go e nance wi h VAT collec ion whe e we
expec o be posi i e i he coun y go e nance
helps o mi iga e he eg essi e impac o VAT
and enhance income dis ibu ion.
We employ wo-s ep sys em GMM o
es ima e Equa ions (1) and (2) because
income inequali y is no a andom walk whe e
he pe o mance o he coun y depends on i
pas pe o mance. The e o e, sys em GMM
helps o co ec o he au oco ela ion in
income inequali y. The GMM echnique is
supe io in add essing po en ial endogenei y,
he e oskedas ici y, and au oco ela ion
p oblems (Doy ch & Uc um, 2011). Fu he mo e,
sys em GMM p o ides mo e e i cien es ima es
when he ins umen s used a e weak (Blundell
& Bond, 1998).
The sample o his s udy consis s o 105
coun ies om 1984 o 2014. The mac oeconomic
da a a e ob ained om Thomson Da as eam
whe eas he da a o coun y go e nance a e
om he ICRG da abase. We u he spli he
sample in o de eloped and de eloping coun ies
o s udy he di e en ial impac o VAT on income
inequali y in such coun ies due o he di e ences
in he objec i e o VAT and go e nmen policies.
The lis o de eloped and de eloping coun ies
is om om he Uni ed Na ions Economic and
Social Council o he Gene al Assembly.
3. Resul s and Discussions
We use wo-s ep sys em GMM es ima ion
o ob ain he s anda d obus es ima ion in
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Economics
de e mining he impac o VAT on income
inequali y and he mode a ing ole o he
coun y’s go e nance in he link be ween VAT
and income inequali y o he ull sample,
de eloped coun ies, and de eloping coun ies.
Tab. 2 shows he es ima ed esul s o he ull
sample. Tabs. 3 and 4 p esen he es ima ed
esul s o de eloped and de eloping coun ies,
espec i ely. Ou base model is Model 1, in
which we examine he main e ec o VAT
on income inequali y. Models 2 h ough 8
p esen he mode a ing e ec o he coun y
go e nance.
Resul s om Model 1 in Tab. 2 indica e
ha VAT inc eases income inequali y a a 5%
signi i cance le el, which suppo s he a gumen
ha VAT is eg essi e in na u e. This esul is
in line wi h he s udies o Leahy e al. (2011)
and Ma inez-Vazquez e al. (2012). In e ms
o economic signi i cance, an inc ease in VAT
e enue as measu ed by he a io o VAT
collec ion o go e nmen e enue by one
(sample) s anda d de ia ion inc eases income
inequali y by 0.29 pe cen age poin s, which
is a ela i ely small e ec . Ne e heless, he
signi i can impac o VAT on income inequali y
in de eloped coun ies is benign (Tab. 3) and
VAT educes income inequali y in de eloping
coun ies a 1% signi i cance le el (Tab. 4). This
i nding suppo s ou i s hypo hesis ha highe
VAT e enue inc eases income inequali y
bu no in de eloping economies. VAT may
inc ease e enue collec ion in de eloping
coun ies in i nancing ans e s and p o ision
o public goods, which esul s in educ ions in
income inequali y in he de eloping coun ies
as compa ed o de eloped coun ies which
al eady ha e a well-es ablished and e i cien
ax collec ion p ocess. This i nding co obo a es
he esul o A i-Yonah (2014), which ound ha
VAT o i nance social p og ams educed income
inequali y and led o highe economic g ow h
(Magu, 2013).
Nex , we i nd ha highe quali y bu eauc acy
educes income inequali y a a 5% signi i cance
le el, hus, suppo ing ou asse ion ha highe
quali y bu eauc acy mi iga es he eg essi e
e ec o VAT. The esul s a e consis en o he
ull sample, de eloped coun ies and de eloping
coun ies. Hence, his i nding sugges s ha
imp o ing he quali y o bu eauc acy is c i ical
o spu he de elopmen p ocess by minimizing
inciden s o abuse o powe by go e nmen
o i cials and he nega i e in l uence o poli ical
mas e s in he go e nmen machine ies,
pa icula ly in ax e enue alloca ion, hus
educing income inequali y.
We also i nd ha high le el o co up ion
con ol educes income inequali y a a 1%
signi i cance le el (Model 3), which is in line
wi h he common expec a ion ha an e ec i e
co up ion con ol enhances he go e nmen
e i ciency (Mau o, 1997). Con e sely, poo
co up ion con ol dis o s he alloca ion o
go e nmen i nancial esou ces, ul ima ely
ad e sely a ec ing he dis ibu ion o income
(see Gup a e al., 2002). The esul s a e
consis en ac oss he h ee samples as shown
in Tab. 2. Ou esul s also sugges ha highe
VAT e enue and a highe le el o co up ion
con ol educe income inequali y in bo h
de eloped and de eloping coun ies. This is
consis en wi h he i ndings o Li e al. (2000)
in Asia, Kwabena (2002) in A ica, Imam and
Jacobs (2007) in Middle Eas e n coun ies, and
a c oss-coun y analysis by Gup a e al. (2002).
As highligh ed by Tanzi and D oodi (1997),
a lowe le el o co up ion due o an e ec i e
co up ion con ol enhances he alloca ion
o unds gene a ed by ax collec ion o he
socie y’s well-being and educes he leakages
in ax e enue (Ajaz & Ahmad, 2010).
Thi d, in e ms o democ a ic accoun abili y
he esul o Model 4 om Tab. 2 shows ha he
in e ac ion be ween democ a ic accoun abili y
and VAT e enues educes income inequali y.
This i nding indica es ha ensu ing ee and
ai elec ions and esponding o he needs
o he people a e no su i cien o na ow
he income gap be ween he poo and he
ich in de eloping coun ies. This is easy o
unde s and because go e nmen s mus ha e
adequa e i nancial esou ces and be highly
esponsi e o he needs o he people o
ensu e ha he people ha e access o a good
educa ion, public ameni ies, quali y heal hca e,
and g owing economic ac i i ies and, hus,
enjoy g ea e access o he weal h o he
na ion which seems o be weak in de eloping
coun ies. Ne e heless, we obse e ha he
in e ac ion e m o VAT e enue and democ a ic
accoun abili y educe income inequali y in bo h
de eloped and de eloping coun ies. This
i nding sugges s ha democ a iza ion imp o es
income dis ibu ion as educa ed indi iduals
ha e mo e oice in public decisions and, hence,
a e able o edis ibu e esou ces o he poo
mo e e i cien ly (Chong & Calde ón, 2000).
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84 2018, XXI, 4
Ekonomie
The oice o educa ed indi iduals is e en mo e
c ucial in implemen ing he VAT because i is
iewed as a highly eg essi e ax accompanied
by he go e nmen ’s p omise o imp o e he
socie y’s economic well-being wi h be e ax
collec ion.
Fou h, Model 5 o Tab. 1 shows he
in e ac ion e m o he VAT e enue and he
go e nmen s abili y educes income inequali y
in bo h de eloped (1% signi i cance le el) and
de eloping coun ies (5% signi i cance le el).
These esul s indica e ha go e nmen s
in de eloped economies a e be e able o
implemen policies and p og ams as decla ed
han de eloping economies, which a e o en
cha ac e ized by ine i ciency in he alloca ion
o esou ces due o ma ke asymme y. Simila
o ou esul s on democ a ic accoun abili y
(in e ms o he main e ec and economic
signi i cance), he esul on go e nmen s abili y
shows ha high s abili y in he go e nmen o
he day is no an impo an ac o in na owing
he income gap, bu i s combina ion wi h highe
go e nmen i nancial esou ces in e ms o
highe collec ion o he VAT e enue c ea es
he desi ed e ec .
Fi h, he esul o Model 6 in Tab. 1
sugges s ha he combina ion o highe VAT
e enue and high-quali y law and o de na ows
he income gap in ou sample coun ies a
a 1% signi i cance le el. Ou esul implies
ha an e ec i e and impa ial legal sys em
enhances he dis ibu ion o go e nmen
i nancial esou ces by ensu ing ha abuse
o powe inciden s a e deal wi h se iously,
hus minimizing leakage in he go e nmen
de elopmen expendi u e due o unsc upulous
beha io . In con as , law and o de does no
signi i can ly mode a e he e ec o VAT e enue
on income inequali y in de eloping coun ies.
We eckon ha his con as ing esul may be
due o he well-es ablished, s onge , and mo e
impa ial legal sys em in de eloped coun ies
o minimize misalloca ion o VAT e enue and
ensu e i s u iliza ion o economic ac i i ies o
p omo e mo e equi able dis ibu ion o income
o ea o legal ep isal. The weak e ec in
de eloping coun ies may due o weake legal
sys em ha opens up oppo uni y o abuse
o powe and ailu e o implemen bene i cial
policies o he people.
Six h, we ound ha he in e ac ion e m
be ween poli ical isk and VAT e enue educes
he income inequali y by 7.90% (Model 7)
and i is s a is ically signi i can a a 1% le el
o bo h de eloped and de eloping coun ies.
This i nding implies ha high poli ical s abili y
enables he go e nmen o ocus on de ising
and implemen ing de elopmen and economic
p og ams o na ow income inequali y. We i nd
ha he in e ac ion e m o VAT e enue and he
poli ical isk a ing educes income inequali y a
10% signi i cance le el. This esul sugges s
ha highe VAT e enue weakens he posi i e
e ec o low poli ical isk on income inequali y
in all ou samples. This may due s able poli ical
en i onmen enables he go e nmen o ope a e
wi h g ea e la i ude o implemen economic
and de elopmen p og ams wi h ce ain y,
he impac is minimal i he go e nmen has
s ong poli ical powe and s abili y o ocus on
cha ing and s ee ing he na ions’ economic
and de elopmen s a egies unin e up ed by
poli ical and social noise. Poli ical and social
ensions can de ail a go e nmen ’s abili y o
pe o m i s du y o he people e en when he
i scal posi ion is s ong. This is suppo ed by
Aizenman and Jinja ak (2008), who highligh ed
ha g ea e poli ical s abili y inc eases he
e i ciency o ax collec ion and, hence, inc eases
he esou ces de o ed o ax en o cemen o
he bene i o social well-being.
Finally, in Model 8 o Tab. 2, we i nd ha
he in e ac ion e m be ween socioeconomic
condi ions and VAT e enues educes
income inequali y a a 1% signi i cance
le el in de eloped economies. Fa o able
socioeconomic condi ions such as low
unemploymen , obus consume con i dence,
and low po e y educe income inequali y by
1.32%. This esul is no su p ising because
socioeconomic condi ions a e di ec ly ela ed
o he indi idual and household le el o income
and dis ibu ion o weal h (OECD, 2012).
Fu he mo e, we obse e ha he in e ac ion
e m o VAT e enue and socioeconomic
condi ions has a ma ginally signi i can nega i e
ela ionship wi h income inequali y a a 10%
le el. Ou i nding sugges s ha imp o ing
socioeconomic condi ions alone has a s onge
impac in educing he income gap. Howe e ,
implemen a ion o he VAT sys em ha adds
o he go e nmen ax e enue appea s o
weaken his impac om he s a is ical poin
o iew. This i nding implies ha go e nmen
should ocus on implemen ing policies ha can
boos employmen oppo uni ies o imp o e
he socioeconomic condi ion pa icula ly in
EM_4_2018.indd 84EM_4_2018.indd 84 28.11.2018 13:12:5628.11.2018 13:12:56
85
4, XXI, 2018
Economics
lowe income g oup o bene i s om he VAT
implemen a ion (OECD, 2012).
Howe e , we obse e a con as ing esul
o he de eloping coun ies in which he
socioeconomic condi ions posi i ely mode a e
he e ec o VAT e enue and income inequali y
a a 1% le el, which we no e seems o d i e
he esul o he ull sample (i.e., ma ginal
mode a ing e ec only). The s a e o he
socioeconomic condi ions in de eloping
coun ies u he exace ba es he nega i e
e ec o he VAT e enue on income inequali y
ha we obse e in he ull sample as well as
in bo h he de eloped and de eloping coun ies
samples. Pu ing i di e en ly, he socioeconomic
condi ions mode a e he e ec o VAT e enue
on income inequali y in de eloping coun ies
bu in a nega i e way. In con as , he s a e
o socioeconomic condi ions in he de eloped
coun ies e e ses he nega i e e ec o
VAT e enue on income inequali y, which is
a desi able ou come. This i nding sugges s ha
s able socioeconomic condi ions indica e a low
deg ee o socioeconomic p essu e and social
dissa is ac ion ha enable he go e nmen o
ocus on implemen ing VAT e enue alloca ion
policies in a way ha educes he income
gap be ween he poo and he ich wi hou
dis ac ion, he eby ealizing he edis ibu i e
e ec o he VAT sys em.
Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Inequali y (-1) 1.033***
(0.012)
0.326***
(0.013)
0.399***
(0.022)
0.381***
(0.015)
0.987***
(0.015)
0.984***
(0.022)
0.753***
(0.024)
0.889***
(0.005)
VAT 0.004**
(0.002)
2.220**
(1.059)
0.388
(0.345)
67.074***
(17.33)
0.088**
(0.036)
1.035***
(0.259)
1.570*
(0.917)
0.586
(0.357)
GDP/Cap 0.238***
(0.038)
0.351***
(0.113)
0.633***
(0.242)
0.511**
(0.228)
0.231
(0.143)
0.124
(0.153)
0.126
(0.177)
0.032***
(0.010)
In l a ion -0.103***
(0.014)
0.044
(0.045)
-0.086
(0.103)
-0.023
(0.084)
0.017
(0.063)
0.003
(0.057)
0.093
(0.088)
-0.030***
(0.003)
In es men 1.313
(0.906)
16.676***
(2.487)
17.339***
(3.195)
16.162***
(3.179)
5.384**
(2.679)
4.085
(2.512)
0.764
(3.125)
2.573***
(0.645)
T ade -0.793**
(0.346)
-1.808*
(1.015)
-0.972
(0.953)
-0.446
(1.050)
-0.587
(0.571)
-0.206
(0.512)
-4.146***
(0.752)
-0.639***
(0.136)
FinDe 1.189***
(0.195)
6.187***
(0.858)
4.458***
(0.925)
4.335***
(0.904)
0.894*
(0.496)
1.437**
(0.606)
2.136**
(0.846)
2.921***
(0.113)
Li e acy -1.839***
(0.517)
-3.147***
(0.997)
-4.515**
(1.775)
-6.742***
(1.445)
-3.610**
(1.540)
-3.032*
(1.546)
-3.062**
(1.205)
-1.314***
(0.259)
Go Exp -0.229
(1.561)
-84.785***
(6.894)
-75.877***
(9.599)
-82.290***
(9.225)
-6.332**
(2.807)
-5.981**
(2.802)
-5.921
(5.252)
-9.807***
(0.365)
C isis 0.994***
(0.195)
2.200***
(0.522)
0.578
(0.911)
1.159
(0.810)
0.297
(0.370)
0.552
(0.365)
3.412***
(0.855)
0.901***
(0.059)
Bu eauc acy --2.070***
(0.254) ------
VAT*
Bu eauc acy --0.905**
(0.424) ------
Co up ion --
-1.165***
(0.286) -----
VAT*
Co up ion --
-0.174
(0.170) -----
Democ a ic ---
0.653**
(0.326) ----
VAT*
Democ a ic ---
-13.405***
(3.458) ----
Tab. 1: Full sample (Pa 1)
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86 2018, XXI, 4
Ekonomie
Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Gs abili y ----
0.018
(0.023) ---
VAT* Gs abili y ----
-0.008**
(0.004) ---
Law -----
0.333
(0.224) --
VAT* Law -----
-0.200***
(0.050) --
Poli ical Risk ------
-0.057***
(0.020) -
VAT* Poli ical
Risk ------
-0.022*
(0.013) -
Socioeconomic -------
-0.536***
(0.026)
VAT*
Socioeconomic -------
-0.086*
(0.052)
Cons an 3.894***
(0.835)
45.828***
(2.123)
40.045***
(2.793)
36.089***
(2.414)
-1.174
(1.769)
0.294
(2.385)
19.185***
(2.782)
8.561***
(0.453)
Yea dummy Included Included Included Included Included Included Included Included
Model i s
Wald chi2 425.00*** 137.18*** 217.17*** 187.223** 297.59*** 456.28*** 573.02*** 240.00***
AR1 -3.16*** -2.06** -2.46** -2.46** -2.95*** -2.92*** -3.38*** -3.14***
AR2 -0.97 -1.34 -1.30 -1.64 -1.06 -1.07 -1.07 -1.17
Sa gan es
(p- alue)
52.91
(0.195)
50.21
(0.386)
57.09
(0.948)
55.21
(0.965)
52.50
(0.966)
48.96
(0.986)
43.10
(0.594)
59.55
(0.122)
No. o
Ins umen s 85 90 118 118 115 115 88 90
No. o
Obse a ions 2,129 2,129 2,129 2,129 2,129 2,129 2,129 2,129
Sou ce: own
No e: This able gi es he eg ession es ima ion esul s based on wo-s age GMM. Inequali y e e s o he Gini coe i cien
in pe cen age; VAT is he pe cen age o alued-added ax o GDP; GDP/Cap is he na u al loga i hm o eal GDP pe
capi a; In l a ion is he pe cen age o in l a ion a e; In es men is he pe cen age o eal g oss capi al o ma ion o GDP
a io base yea o 2010; T ade is he a io o ade openness; FinDe is he a io o p i a e c edi o GDP; Li e acy is he
li e acy a e measu ed in pe cen age; Go Exp is he pe cen age o go e nmen expendi u e o GDP; C isis i he dummy
a iable assigned o economic c isis (1 = c isis yea ; o he wise, 0); Bu eauc acy e e s o bu eauc acy quali y; Co up i-
on e e s o he co up ion index; Democ a ic e e s o democ a ic accoun abili y; Gs abili y e e s o go e nmen s abili y;
Law e e s o law and o de ; Poli ical isk e e s o poli ical isk a ing; Socioeconomic e e s o socioeconomic condi ions.
* ep esen s signi i cance a 10%, ** ep esen signi i cance a 5%, *** ep esen signi i cance a 1%.
Tab. 1: Full sample (Pa 2)
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4, XXI, 2018
Economics
Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Inequali y (-1) 1.025***
(0.015)
1.026***
(0.038)
0.954***
(0.028)
0.984***
(0.029)
0.985***
(0.022)
0.946***
(0.031)
0.977***
(0.030)
0.938***
(0.036)
VAT 3.478
(3.184)
11.468**
(5.565)
10.100
(9.174)
27.775**
(13.025)
11.475
(7.378)
25.591**
(9.869)
20.594**
(8.974)
16.669***
(6.364)
GDP/Cap 0.425***
(0.047)
0.896***
(0.192)
0.474**
(0.225)
1.271***
(0.213)
1.074***
(0.194)
1.268***
(0.162)
1.196***
(0.179)
0.914***
(0.330)
In l a ion -0.325***
(0.018)
-1.902**
(0.767)
0.215
(0.138)
0.052
(0.112)
-0.025
(0.080)
0.135
(0.099)
0.111
(0.089)
-0.206
(0.684)
In es men 5.129***
(0.950)
3.528
(3.096)
6.913***
(2.618)
13.483***
(3.216)
8.814***
(2.665)
10.080***
(2.459)
12.651***
(3.579)
6.741***
(2.588)
T ade -3.686***
(0.575)
-0.455
(0.315)
-0.132
(0.352)
-0.307
(0.269)
-0.154
(0.186)
-0.571**
(0.250)
-0.280
(0.240)
-0.445
(0.295)
FinDe -0.289
(0.228)
-1.475***
(0.446)
-0.933**
(0.433)
-0.449
(0.551)
-0.618*
(0.368)
-0.241
(0.435)
-0.344
(0.484)
-0.060
(0.631)
Li e acy 20.435***
(6.934)
1.205
(1.828)
5.722**
(2.511)
1.868
(2.820)
3.117
(1.911)
2.248
(2.656)
2.980
(2.558)
5.971**
(2.635)
Go Exp -21.266***
(2.375)
-18.871***
(5.706)
-17.056***
(3.471)
-21.226***
(5.098)
-8.889***
(2.728)
-19.242***
(3.455)
-18.879***
(3.514)
-24.304***
(6.760)
C isis 0.368***
(0.121)
1.590***
(0.488)
0.073
(0.525)
0.415
(0.527)
0.613
(0.520)
0.273
(0.492)
0.404
(0.444)
1.533***
(0.472)
Bu eauc acy - 0.494*
(0.292) ------
VAT*
Bu eauc acy --0.017***
(0.004) ------
Co up ion - - -0.045
(0.167) -----
VAT* Co up ion - - -0.013***
(0.003) -----
Democ a ic - - - -0.216
(0.136) ----
VAT* Democ a ic - - - -0.009***
(0.002) ----
Gs abili y ----
-0.203***
(0.058) ---
VAT* Gs abili y ----
-0.006***
(0.001) ---
Law -----
-0.275
(0.185) --
VAT* Law -----
-0.007***
(0.001) --
Poli ical Risk ------
-0.016
(0.014) -
VAT* Poli ical
Risk ------
-0.001***
(0.000) -
Socioeconomic -------
-0.009
(0.063)
VAT*
Socioeconomic -------
-0.005***
(0.002)
Tab. 2: De eloped coun ies (Pa 1)
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