Tax Evasion and VAT Rates: Evidence from a Setting with Limited Tax-Shifting
33 Pages Posted: 27 Mar 2015 Last revised: 9 Jun 2018
Date Written: April 12, 2018
This paper examines the effect of value-added tax (VAT) rates on tax evasion in a setting with limited tax-shifting. I find that a large, unexpected reduction on the VAT rate of non- alcoholic restaurant sales, from 23% to 13%, implemented in Greece in August 2013, significantly increased compliance, since the reported sales to inputs ratio, used as a measure of disclosure of hidden sales, increased by 8–11%. I also document the reverse effect for the VAT rate increase, from 13% to 23%, in September 2011 (-11%). The effect is more pronounced in small firms and is monotonic across quartiles formed on the percentage of alcohol sales, the tax rate of which remained unchanged throughout the sample period. These results suggest that, in order to avoid signaling evading activity to tax authorities, firms actively adjust their reported sales to tax rate changes at a level that maintains a reasonable VAT ratio (output to input VAT).
Keywords: Tax evasion, Value-added tax, Sales underreporting, Small firms, Informality
JEL Classification: H25, H26, D78
Suggested Citation: Suggested Citation