Does the Value-added Tax Lead to an `Ineciently' Large Government?

This paper examines the hypothesis that the adoption of a value-added tax (VAT) leads to an inecient expansion of government size. We propose a simple conjecture: Demandside push for ineciently large government increases the tendency for a VAT to substitute for other tax instruments|rather than simply to raise more revenue. Using a panel of 33 OECD countries over 38 years, we nd that (1) countries with a higher level of political activities gain less revenue from the adoption of a VAT, and (2) the use of VATs has not caused an increase in inecient forms of government expenditures. These ndings suggest that inecient expansion of government is less likely to be nanced by an ecient tax, VAT. JEL-Code: H20, H21, H60