The Double Dividend of a Joint Tariff and VAT Reform: Evidence from Iran

Abstract

This paper provides empirical evidence on a novel complementarity between VAT and trade taxes. Downstream domestic firms require VAT receipts from importers to claim VAT on purchases, increasing incentives for honest reporting of imports. Trade gap, the difference between mirror and domestic trade reports in Iran at 6-digit HS disaggregation, is used to measure this complementarity. Iran introduced VAT in 2008 and, since then, has increased its rate from 3 to 9 percent. Difference-in-differences estimates show that a 1 percentage point increase in the VAT rate reduces the trade gap by about 2 percent. Consistent with the compliance mechanisms for VAT, a smaller effect for consumer products that have a shorter value chain is observed. Findings suggest that replacing tariffs with VAT results in a double dividend. Tax revenue might increase due to better tariff compliance and a broader VAT base.

Tariff Evasion, the Trade Gap, and Structural Trade

“…When doing so, RTA is the only transport cost measure for which I can estimate a coefficient. Column (4) replaces the product and country pair fixed effects with 19 In unreported results, I tried further proxies for border enforcement, including the World Bank's Logistics Performance Index (https://lpi.worldbank.org/international) for the exporter-year and importer-year and the United Nations voting similarity index which operates at the country pair-year level (see Voeten, Strezhnev, Bailey (2009) for details on construction). These were not significant.…”

“…I employ three variables intended to capture enforcement at the border. 19 The first of these is the rule of law measure provided in the World Bank's World Governance Indicators. 20 These data, which are available by country-year, were normalized to run from zero to one, with one being the strongest rule of law.…”

Tariff Evasion, the Trade Gap, and Structural Trade

“…Second, we include a dummy variable indicating whether a country suffered a terrorist attack in a given year. 19 These data come from the Global Terrorism Database. 20 Operating under the assumption that countries who have experienced a terrorist attack monitor their borders more fiercely, something 13 This can be found at https://www.ewf.uni-bayreuth.de/en/research/RTA-data/index.…”

“…18 See https://databank.worldbank.org/source/worldwide-governance-indicators. 19 In unreported results, we instead used the number of attacks with similar results. 20 See https://www.start.umd.edu/gtd/.…”