The Evolution of Potential VAT Revenues and C-Efficiency in Advanced Economies

IMF Working Papers, July 11, 2017

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The Evolution of Potential VAT Revenues and C-Efficiency in Advanced Economies

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Bibliographic details

• Authors: Junji Ueda
• Published: July 11, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484305874.001

Summary

• Objective: Analyze cyclical movements of value-added tax (VAT) revenues in advanced economies by decomposing changes in the C-efficiency ratio into changes in the compliance and policy gaps between 2000 and 2014.
• Data and scope: Panel of EU member countries and Japan.
• Key conclusion: The cyclicality of C-efficiency is explained by the correlation of both the compliance and policy gaps with the output gap. The cyclicality of the compliance gap appears short lived and larger in countries with high compliance gaps. The cyclicality of the policy gaps largely reflects behavior-induced changes, notably in government consumption and, to a lesser degree, in the composition of household consumption.

Methodology and analytical approach

• Decomposition: C-efficiency ratio decomposed into compliance gap and policy gap components.
• Time frame analyzed: between 2000 and 2014.
• Geographic coverage: EU member countries and Japan.
• Analytical focus: Correlation of each gap (compliance and policy) with the output gap and identification of behavior-induced versus parameter-driven changes in policy gaps.

Main findings

• C-efficiency cyclicality:
  • Explained by the correlation of both compliance and policy gaps with the output gap.
• Compliance gap:
  • Cyclicality is short lived.
  • Larger cyclicality observed in countries with high compliance gaps.
• Policy gap:
  • Cyclicality largely reflects behavior-induced changes rather than changes in policy parameters.
  • Notably influenced by government consumption.
  • To a lesser degree influenced by the composition of household consumption.

Implications for revenue analysis and policy

• Revenue cyclicality assessment should account for both compliance and policy gap dynamics and their correlation with the output gap.
• Short-lived nature of compliance-gap cyclicality suggests transitory revenue effects tied to economic cycles, especially in countries with large compliance gaps.
• Changes in government consumption and household consumption composition can materially affect the policy gap and thus apparent VAT revenue performance even without formal policy parameter changes.
• Policy monitoring should distinguish between parameter changes and behavior-induced shifts to better interpret VAT revenue movements.

Content in this bundle

• The Evolution of Potential VAT Revenues and C-Efficiency in Advanced Economies, WP/17/158, July 2017
  • The Evolution of Potential VAT Revenues and C-Efficiency in Advanced Economies, WP/17/158, July 2017 (Markdown version)
  • The Evolution of Potential VAT Revenues and C-Efficiency in Advanced Economies, WP/17/158, July 2017 (PDF)