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FISCAL STRUCTURAL REFORMS: THE EFFECT OF CARD PAYMENTS ON VAT REVENUE IN THE EURO AREA

 

 

George Hondroyiannis

Bank of Greece and Harokopio University

 

Dimitrios Papaoikonomou

Bank of Greece

 

 

Abstract

The use of traceable payment methods presents an additional reform option for improving tax compliance. As regards consumption, card payments are the main alternative to cash in the euro area. Although the use of micro-data has provided clear evidence in favour of increasing information trails, time series evidence on the role of card payments in increasing compliance have been scarce and confined to the recent experience of Greece. The effect of card payments on VAT revenue is investigated using quarterly panel data for the 19 euro area economies covering the period 2003q1-2016q4. Time-varying coefficient methods are employed in order to estimate the country-specific contribution of compliance to revenue growth as a function of card payments. In line with the micro-data literature, the analysis indicates that increasing the share of card payments in private consumption expenditure improves VAT tax compliance. The gains are found to increase: (i) the lower the initial level of card use; (ii) the higher the share of self-employment and (iii) the lower the level of revenue efficiency. The highest benefits are estimated for Greece and Italy.

 

JEL classification: H21, H25, H26

Keywords: VAT, card payments, tax compliance, time-varying coefficients, Euro area

 

Acknowledgements: We would like to thank Heather Gibson, Sofia Anyfantaki and Harris Dellas for very helpful comments, Adi Brender for a very constructive discussion of an earlier version at the 20th Banca d’Italia Fiscal Policy Workshop and the members of the ESCB WGPF for helpful comments during a presentation at the WGPF meeting of 17/10/2017.  The views expressed are those of the authors and should not be interpreted as those of their respective institutions.

 

 

Corresponding author:

George Hondroyiannis

Fiscal Affairs Division

Economic Analysis and Research Department

Bank of Greece

21, E. Venizelos Avenue

Athens 102 50, Greece

 Tel. +30 210 3202429

 email: ghondroyiannis@bankofgreece.gr


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