Many have held that value-added tax (VAT) generates higher revenue which then leads to bigger government spending. They cited the experience of European countries claiming that both the tax rate and the government size have risen over the years. The present study finds that there are exceptions to it based on the state level data of India. The tax was introduced as a replacement for sales tax about a decade ago but an increase in government size was not observed. Instead, higher revenues generated helped in the reduction of budget deficits when introduced along with a number of austerity measures among which was the enactment of the fiscal responsibility law (FRL) placing quantitative restrictions on budget deficits. Some states did witness bigger spending but most of them were observed to be financially weaker states receiving more central transfers. It enabled them to spend more without running into deficits and, hence, meet FRL obligations.
BagchiA. (2005). State VATs in operation: Promises and problems. Money & Finance, 2(20–21), 29–44.
2.
BarroJ. (2012). Value-added tax would raise tons for U.S. coffers. Retrieved from https://www.bloomberg.com/view/articles/2012-05-02/value-added-tax-would-raise-tons-for-u-s-coffers
3.
BartlettB. (2007). Starve the beast: Origins and development of a budgetary metaphor. The Independent Review, 12(1), 5–26.
4.
BartlettB. (2010). Tax cuts and ‘starving the beast’. Forbes. Retrieved from http://www.forbes.com/2010/05/06/tax-cuts-republicans-starve-the-beast-columnists-bruce-bartlett.html
5.
BartlettB. (2011). The conservative case for a VAT. In SullivanM. A. (Ed.), The VAT reader (pp. 83–95). Falls Church, VA: Tax Analysts.
6.
BeckN., & KatzJ. N. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634–647.
7.
BickleyJ. M. (2006). Value-added tax: A new U.S. revenue source? (CRS Report for the Congress, Order Code RL 33619). Retrieved from https://fas.org/sgp/crs/misc/RL33619.pdf
8.
Business Standard (2009, December31). Chhattisgarh raises VAT rates by 1–1.5 percent. Business Standard. Retrieved from http://www.business-standard.com/article/economy-policy/chhattisgarh-raises-vat-rates-by-1-1-5-109123100084_1.html
9.
Business Standard (2011, September16). AP justifies hike in VAT. Business Standard. Retrieved from http://www.business-standard.com/article/economy-policy/ap-justifies-hike-in-vat-111091600061_1.html
10.
Business Standard (2013, July12). Higher VAT rate to stay in Karnataka. Business Standard. Retrieved from http://www.business-standard.com/article/news-ians/higher-vat-rate-to-stay-in-karnataka-113071201013_1.html
11.
ChristianE. S., & RobbinsG. A. (2011). A value-added tax fuels big government. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424053111903596904576518274100145458
12.
EbrillL., KeenM., BodinJ. P., & SummersV. (2001). The modern VAT. Washington, DC: International Monetary Fund.
13.
FriedmanM. (2003). What every American wants. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB1042593796704188064
14.
GaleW. G., & HarrisB. H. (2011). A VAT for the United States: Part of the solution. In SullivanM. A. (Ed.), The VAT reader (pp. 64–82). Falls Church, VA: Tax Analysts.
15.
Government of India (GoI) (2004). Report of the Twelfth Finance Commission (2005–10). New Delhi: Author.
16.
HoechleD. (2007). Robust standard errors for panel regressions with cross-sectional dependence. The Stata Journal, 7(3), 281–312.
17.
HolcombeR. G. (2010). The value added tax: Too costly for the United States (Working Paper No. 10–32). Fairfax, VA: George Mason University.
18.
KeenM. (2013). The anatomy of the VAT (IMF Working Paper No. WP/13/111). Washington, DC: International Monetary Fund.
19.
KeenM., & LockwoodB. (2006). Is the VAT a money machine?National Tax Journal, 59(4), 905–928.
20.
McGowanJ. R. (1994). More U.S. revenue? An analysis of the European community VAT: Implications for U.S. tax policy. Washington, DC: Tax Foundation and Ernst & Young.
21.
MikesellJ. L. (2014). Misconceptions about value-added and retail sales taxes: Are they barriers to sensible tax policy?Public Budgeting & Finance, 34(2), 1–23.
22.
MitchellD. J. (2005a, March31). The impact of government spending on economic growth (Backgrounder Report No. 1831). Washington, DC: The Heritage Foundation.
23.
MitchellD. J. (2005b, May16). Beware the value-added tax (Backgrounder Report No. 1852). Washington, DC: The Heritage Foundation.
24.
National Institute of Public Finance and Policy (NIPFP) (1994). Reform of domestic trade taxes in India: Issues and options. Report of a study team. New Delhi: Author.
25.
NepramD. (2011). State level value added tax and its revenue implications in India: A panel data analysis. Margin, 5(2), 245–265.
26.
NiskanenW. A. (2006). Limiting government: The failure of ‘starve the beast’. Cato Journal, 26(3), 553–558.
27.
Reserve Bank of India (RBI) (2009). State finance: A study of budgets of 2008–09. Mumbai: Author.
28.
Reserve Bank of India (RBI) (2010). State finance: A study of budgets of 2009–10. Mumbai: Author.
29.
Reserve Bank of India (RBI) (2015). State finances: A study of budgets of 2014–15. Mumbai: Author.
30.
Reserve Bank of India (RBI) (2016). State finances: A study of budgets of 2015–16. Mumbai: Author.
31.
RomerC. D., & RomerD. H. (2009). Do tax cuts starve the beast? The effect of tax changes on government spending. Brookings Papers on Economic Activity, 1(1, Spring), 139–200.
32.
SopakP. (2012). Tax expenditures and the efficiency of Croatian value added tax. Financial Theory and Practice, 36(3), 269–296.
33.
StockfischJ. A. (1985). Value-added taxes and the size of government: Some evidence. National Tax Journal, 38(4), 547–552.
34.
The Empowered Committee of State Finance Ministers (2005). A white paper on state-level value added tax. New Delhi: Ministry of Finance.
35.
The Empowered Committee of State Finance Ministers (2009). First discussion paper on goods and services tax in India. New Delhi: Ministry of Finance.
36.
The Hindu (2013, March12). West Bengal budget raises VAT rates in ₹8- cr. deficit budget. The Hindu. Retrieved from http://www.thehindu.com/news/national/other-states/west-bengal-raises-vat-rates-in-rs-8cr-deficit-budget/article4498414.ece
37.
The President’s Advisory Panel on Federal Tax Reform (2005, November). Simple, fair, and pro-growth: Proposals to fix America’s tax system. Washington, DC: Author.
38.
Torres-ReynaO. (2007). Panel data analysis: Fixed and random effects using Stata (v. 4.2). Princeton, NJ: Princeton University. Retrieved from http://dss.princeton.edu/training/
39.
ZodrowG. R. (1999). The sales tax, the VAT, and taxes in between-or, is the only good NRST a ‘VAT in drag’?National Tax Journal, 52(3), 429–442.
