Alternative method to measure the VAT gap in the EU: Stochastic tax frontier model approach.

Danuse Nerudova,Stefan Cristian Gherghina,Marian Dobranschi

doi:10.1371/journal.pone.0211317

Danuse Nerudova, Stefan Cristian Gherghina + Show 1 more

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https://doi.org/10.1371/journal.pone.0211317

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Journal: PloS one	Publication Date: Jan 28, 2019
Citations: 13	License type: CC BY 4.0

Affiliation: Mendel University in Brno

Abstract

In this paper, we pursue an alternative method to measure the Value Added Tax gap in the European Union using the stochastic tax frontier model. We use the Value Added Tax total tax liability as the input to estimate the optimal frontier of the Value Added Tax, as well as to predict technical inefficiency. Using the latest innovations of the stochastic frontier approach, we aim to obtain the accurate size of the Value Added Tax gap in the EU-26 countries and contrast them with extant estimates. The obtained estimates of the Value Added Tax gap using the stochastic tax frontier model are different from the estimates produced by the top-down method to calculate the Value Added Tax gap in the EU. Moreover, the stochastic tax frontier approach allows us to disentangle the Value Added Tax gap, which is time dependent, from the persistent Value Added Tax gap, which is country specific. The stochastic tax frontier model allows us to test the effect of exogenous factors on the technical inefficiency of the Value Added Tax and propose appropriate policy recommendations.

Highlights

Tax gap occurrence represents an ever-growing source of negative effects with multidimensional implications on public policy
The first model addresses the issue of heteroscedasticity, assuming that the VAT inefficiency is affected by external factors not included in either the inputs or outputs of the STFM
The first advantage of the STFM over the top-down method adopted by CASE reports is the possibility of estimating the VAT gap and analyzing what the external factors that affect the VAT inefficiency are

Summary

Introduction

Tax gap occurrence represents an ever-growing source of negative effects with multidimensional implications on public policy. Tax gap measurement is worthwhile policy wise because it could provide essential information for a better understanding of tax compliance and its implications on tax policy. The Value Added Tax (hereinafter VAT) represents one of the most important sources of tax revenue in the EU member states, currently constituting approximately one-fifth of total tax revenues. The member states face global challenges with tackling tax evasion and tax fraud in the area of direct as well as indirect taxation. The precise determination of VAT gap is a fundamental step in assessing the VAT efficiency and uncovering the true size of tax evasion and tax avoidance.

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