Does value-added tax revenue inspire growth? Evidence from Southern Africa

Abstract

The purpose of this article is to take the lead and investigate value-added tax (VAT) revenue and economic growth in Southern Africa, especially referring to the Southern African Development Community (SADC). The objective of the study on which this article reports was to look at the relationship between VAT revenue and economic growth. The hypothesis was whether VAT revenue had an impact on economic growth or alternatively whether VAT revenue had no impact on economic growth. The effect of VAT on economic growth in different countries is unclear, and this has become an important empirical question. Our two-stage least squares model indicated that VAT revenue has a positive impact on economic growth. The same goes for the generalised method of moments (GMM) model. The corruption perception index also leads to a positive outcome on economic growth. The current study attempted to contribute to the surprisingly small body of academic economics research examining value-added tax in Southern African countries. Policymakers and revenue authorities should thus take note that room for higher VAT rates exists although these are already quite high in SADC. VAT is regarded as a regressive tax commonly burdening the poor. Alternatively, higher VAT rates and revenues on luxury goods commonly purchased by the wealthy might be an alternative option for further investigation in the future. Efficient and corruption-free service delivery in SADC can contribute to future VAT revenues supporting economic development in the region.