Effects of a Tax Reform: Increase in Value-Added Tax in Ecuador as a Post-Catastrophe Economic Measure
Keywords:
Fiscal policy, Taxation, Income distribution, Income policy, Ecuador
Abstract
This study delves into the direct impact of a 2% increase in Value Added Tax (VAT) on firms' sales in Ecuador. Employing a quasi-experimental design and canton-level data (224) for the period 2014-2017, we compare the sales of localities affected by the tax reform (treatment group) with those that were not (control group). By utilizing a difference-in-differences analysis, we were able to isolate the specific effect of the VAT increase, minimizing the impact of other factors that may have influenced sales during that period. The results reveal a negative and statistically significant causal relationship between the VAT hike and firms' sales. In other words, the increase in the tax led to a contraction in the demand for goods and services, resulting in a decline in firms' revenue. These findings suggest that increases in consumption taxes can adversely affect economic activity by discouraging consumption and negatively impacting firms' competitiveness. The results of this research hold significant implications for the formulation of fiscal policy, as they highlight the need to carefully evaluate the potential side effects of changes in tax rates on consumer and firm behavior.
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References
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Hedau, A. (2018). A Review of Canons of Taxation: India's Perspective. Asian Journal of Research in Social Sciences and Humanities, 8(2), 41–53. https://doi.org/10.5958/2249-7315.2018.00024.2
Imbens, G. W., & Wooldridge, J. M. (2009). Recent developments in the econometrics of program evaluation. Journal of Economic Literature, 47(1), 5-86. https://doi.org/10.1257/jel.47.1.5
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LaLonde, R. J. (1986). Evaluating the econometric evaluations of training programs with experimental data. The American Economic Review, 76(4), 604-620. https://www.jstor.org/stable/1806062
Li, H., Graham, D. J., & Majumdar, A. (2012). The effects of congestion charging on road traffic casualties: A causal analysis using difference-in-difference estimation. Accident Analysis & Prevention, 49, 366-377. https://doi.org/10.1016/j.aap.2012.02.013
Macas-Acosta, G., Macas-Lituma, G., & Vergara-Romero, A. (2022). The Internal and External Factors That Determined Private Investment in Ecuador 2007–2020. Economies, 10(10), 248. https://doi.org/10.3390/economies10100248
McBride, W. (2012). What Is the Evidence on Taxes and Growth? Tax Foundation Special Report, 207. https://taxfoundation.org/what-evidence-taxes-and-growth/
Mencinger, J., Aristovnik, A., & Verbič, M. (2017). Asymmetric effects of fiscal policy in EU and OECD countries. Economic Modelling, 61, 448-461. https://doi.org/10.1016/j.econmod.2016.12.023
Randolph, W. C. (2006). International burdens of the corporate income tax. Washington, DC: Congressional Budget Office. https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/workingpaper/2006-09_0.pdf
Rolph, E. R. (1952). A Proposed Revision of Excise Tax Theory. Journal of Political Economy, 60(2), 102-116. https://doi.org/10.1086/257173
Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3), 763-801. https://doi.org/10.1257/aer.100.3.763
Romero-Subia, J. F., Jimber-del Rio, J. A., Ochoa-Rico, M. S., & Vergara-Romero, A. (2022). Analysis of Citizen Satisfaction in Municipal Services. Economies, 10(9), 225. https://doi.org/10.3390/economies10090225
Segura, A. (2015). Some Thoughts on Fiscal Policy and the Unfinished Agenda. In FMI, Peru: Staying the Course of Economic Success (International). Washington, D.C: International Monetary Fund. https://doi.org/10.5089/9781513521473.071
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Van Der Wielen, W. (2019). The Macroeconomic Effects of Tax Reform: Evidence from the EU (No. 04/2019). JRC Working Papers on Taxation and Structural Reforms. https://www.econstor.eu/handle/10419/202262
Vergara-Romero, A., Jimber-del-Río, J-A., & Márquez-Sánchez, F. (2022). Food Autonomy within Food Sovereignty: Evidence from a Structural Model. Agronomy, 12(5), 1141. https://doi.org/10.3390/agronomy12051141
Alm, J., Sennoga, E., & Skidmore, M. (2009). Perfect competition, urbanization, and tax incidence in the retail gasoline market. Economic Inquiry, 47(1), 118-134. https://doi.org/10.1111/j.1465-7295.2008.00164.x
Angrist, J. D., & Pischke, J-S. (2009). Mostly harmless econometrics: An empiricist's companion. New Jersey: Princeton University Press.
Angrist, J. D., & Pischke, J-S. (2010). The credibility revolution in empirical economics: How better research design is taking the con out of econometrics. Journal of Economic Perspectives, 24(2), 3-30. https://doi.org/10.1257/jep.24.2.3
Arnold, J. M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C., & Vartia, L. (2011). Tax policy for economic recovery and growth. The Economic Journal, 121(550), F59-F80. https://doi.org/10.1111/j.1468-0297.2010.02415.x
Barro, R. J., & Redlick, C. J. (2011). Macroeconomic effects from government purchases and taxes. The Quarterly Journal of Economics, 126(1), 51-102. https://doi.org/10.1093/qje/qjq002
BCE, Central Bank of Ecuador. (2017). Información Estadística Mensual. Quito: Banco Central del Ecuador. https://contenido.bce.fin.ec/documentos/PublicacionesNotas/Catalogo/IEMensual/Indices/m1990122017.htm
Bishop, R. L. (1968). The effects of specific and ad valorem taxes. The Quarterly Journal of Economics, 82(2), 198–218. https://doi.org/10.2307/1885894
Blagrave, P. (2005). An analysis of the impact of the Harmonized Sales Tax on provincial revenues in Atlantic Canada. Cana-dian Public Policy/Analyse de politiques, 13, 319-331. https://doi.org/10.2307/3552444
Blanchard, O., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics, 117(4), 1329-1368. https://doi.org/10.1162/003355302320935043
Brown, H. G. (1939). The incidence of a general output or a general sales tax. Journal of Political Economy, 47(2), 254–262. https://doi.org/10.1086/255363
Burriel, P., De Castro, F., Garrote, D., Gordo, E., Paredes, J., & Pérez, J. J. (2010). Fiscal policy shocks in the euro area and the US: an empirical assessment. Fiscal Studies, 31(2), 251-285. https://doi.org/10.1111/j.1475-5890.2010.00114.x
Card, D., & Krueger, A. B. (1994). Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania. The American Economic, 84(4), 772-793. https://www.jstor.org/stable/2118030
Carnot, N., & De Castro, F. (2015). The discretionary fiscal effort: an assessment of fiscal policy and its output effect. Hacienda Pública Española, (215), 63-94. https://doi.org/10.7866/HPE-RPE.15.4.3
Conesa, J. C., Díaz-Giménez, J., Díaz-Saavedra, J., & Pijoan-Mas, J. (2010). La Subida del Impuesto Sobre el Valor Añadido en España: Demasiado Cara y Demasiado Pronto. Fundación de Estudios de Economía Aplicada, Documento de Trabajo, 17, 6.
Donald, S. G., & Lang, K. (2007). Inference with difference-in-differences and other panel data. The Review of Economics and Statistics, 89(2), 221-233. https://doi.org/10.1162/rest.89.2.221
Favero, C., & Giavazzi, F. (2012). Measuring tax multipliers: The narrative method in fiscal VARs. American Economic Journal: Economic Policy, 4(2), 69-94. https://doi.org/10.1257/pol.4.2.69
Finkelstein, A. (2002). The effect of tax subsidies to employer-provided supplementary health insurance: evidence from Canada. Journal of Public Economics, 84(3), 305-339. https://doi.org/10.1016/S0047-2727(00)00155-9
Gale, W. G., & Samwick, A. A. (2017). Effects of income tax changes on economic growth. In The economics of tax policy, 13-39. https://doi.org/10.2139/ssrn.2494468
García Núñez, L. (2011). Econometría de Evaluación de Impacto. Revista de Economía, 34(67), 81-125. http://repositorio.minedu.gob.pe/handle/20.500.12799/3469
Gechert, S., Horn, G., & Paetz, C. (2019). Long-term Effects of fiscal Stimulus and Austerity in Europe. Oxford Bulletin of Economics and Statistics, 83(1), 647-666. https://doi.org/10.1111/obes.12287
Gertler, P. J., Martínez, S., Premand, P., & Rawlings, L. B. (2017). La evaluación de impacto en la práctica. Inter-American Development Bank Publications. https://publications.iadb.org/es/la-evaluacion-de-impacto-en-la-practica-segunda-edicion
Gravelle, J., & Hungerford, T. L. (2007). Corporate Tax Reform: Issues for Congress. Congressional Research Service.
Hedau, A. (2018). A Review of Canons of Taxation: India's Perspective. Asian Journal of Research in Social Sciences and Humanities, 8(2), 41–53. https://doi.org/10.5958/2249-7315.2018.00024.2
Imbens, G. W., & Wooldridge, J. M. (2009). Recent developments in the econometrics of program evaluation. Journal of Economic Literature, 47(1), 5-86. https://doi.org/10.1257/jel.47.1.5
Infantino, L. (2020). Society and Power. In: Infrasocial Power. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-45081-6_1
Kahn-Lang, A., & Lang, K. (2019). The Promise and Pitfalls of Differences-in-Differences: Reflections on 16 and Pregnant and Other Applications. Journal of Business & Economic Statistics, 38(3), 613–620. https://doi.org/10.1080/07350015.2018.1546591
LaLonde, R. J. (1986). Evaluating the econometric evaluations of training programs with experimental data. The American Economic Review, 76(4), 604-620. https://www.jstor.org/stable/1806062
Li, H., Graham, D. J., & Majumdar, A. (2012). The effects of congestion charging on road traffic casualties: A causal analysis using difference-in-difference estimation. Accident Analysis & Prevention, 49, 366-377. https://doi.org/10.1016/j.aap.2012.02.013
Macas-Acosta, G., Macas-Lituma, G., & Vergara-Romero, A. (2022). The Internal and External Factors That Determined Private Investment in Ecuador 2007–2020. Economies, 10(10), 248. https://doi.org/10.3390/economies10100248
McBride, W. (2012). What Is the Evidence on Taxes and Growth? Tax Foundation Special Report, 207. https://taxfoundation.org/what-evidence-taxes-and-growth/
Mencinger, J., Aristovnik, A., & Verbič, M. (2017). Asymmetric effects of fiscal policy in EU and OECD countries. Economic Modelling, 61, 448-461. https://doi.org/10.1016/j.econmod.2016.12.023
Randolph, W. C. (2006). International burdens of the corporate income tax. Washington, DC: Congressional Budget Office. https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/workingpaper/2006-09_0.pdf
Rolph, E. R. (1952). A Proposed Revision of Excise Tax Theory. Journal of Political Economy, 60(2), 102-116. https://doi.org/10.1086/257173
Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3), 763-801. https://doi.org/10.1257/aer.100.3.763
Romero-Subia, J. F., Jimber-del Rio, J. A., Ochoa-Rico, M. S., & Vergara-Romero, A. (2022). Analysis of Citizen Satisfaction in Municipal Services. Economies, 10(9), 225. https://doi.org/10.3390/economies10090225
Segura, A. (2015). Some Thoughts on Fiscal Policy and the Unfinished Agenda. In FMI, Peru: Staying the Course of Economic Success (International). Washington, D.C: International Monetary Fund. https://doi.org/10.5089/9781513521473.071
Senplades, Secretaria Nacional de Planificación y Desarrollo. (2016). Evaluación de los costos de reconstrucción. Sismo en Ecuador. Abril 2016. Quito: Senplades. https://docplayer.es/33824032-Evaluacion-de-los-costos-de-reconstruccion-sismo-en-ecuador-abril-resumen-ejecutivo.html
Van Der Wielen, W. (2019). The Macroeconomic Effects of Tax Reform: Evidence from the EU (No. 04/2019). JRC Working Papers on Taxation and Structural Reforms. https://www.econstor.eu/handle/10419/202262
Vergara-Romero, A., Jimber-del-Río, J-A., & Márquez-Sánchez, F. (2022). Food Autonomy within Food Sovereignty: Evidence from a Structural Model. Agronomy, 12(5), 1141. https://doi.org/10.3390/agronomy12051141
Published
2024-09-15
How to Cite
Macas-Acosta, G., Macas-Lituma, G., & Vergara-Romero, A. (2024). Effects of a Tax Reform: Increase in Value-Added Tax in Ecuador as a Post-Catastrophe Economic Measure. Journal of the University of Zulia , 15(44), 425-446. https://doi.org/10.5281/zenodo.13763944
Section
Papers
Copyright (c) 2024 Guido Macas-Acosta, Génesis Macas-Lituma, Arnaldo Vergara-Romero
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