Vat Gap in the European Union: an empirical analysis

Abstract

For welfare systems whose backing relies mainly on the tax revenues collected, tax non-compliance is an issue of great importance. Concretely in the European Union, a considerable amount of tax revenue is lost in terms of VAT. This is the so-called VAT Gap, the term that stands for the difference between the VAT Total Tax Liability and the VAT revenue actually collected. In view of the importance of this matter, and of the lack of awareness of which factors affect such VAT non-compliance, this study aims to throw some light by means of an econometric model on whether or not shadow economy, decentralization, institutional quality, missing trader fraud, VAT standard rates, or the amount of 500 euro bills available each year for each member state affect the VAT Gap. To that purpose, the model will be based on panel data including information on those variables for the 28 Member States of the European Union and for the years 2012 to 2016. The main findings of the study are the following. First, higher institutional quality is found to affect negatively to the VAT Gap. Second, a higher fiscal decentralization appears to decrease significantly the VAT Gap. Third, higher amounts of 500 euro bills annually available increase such gap. Other variables checked do not appear to be significantly determinant of the VAT non-compliance in this model as can be seen in the results.