The effect of card payments on VAT revenue in the euro area: evidence from a panel VECM

Abstract

PurposeA growing amount of micro-data analyses has highlighted the importance of information trails, such as generated by card transactions, for improving tax compliance. Yet, time series evidence indicating a positive effect of card payments on VAT revenue performance has been scarce. This paper revisits the question of the effect of card payments on VAT revenue by using annual and quarterly panel data for the 19 euro area member states, covering the period 2000–2016.Design/methodology/approachA panel VECM is employed in order to address endogeneity issues and to account for common stochastic trends, which, is shown to be crucial in revealing the anticipated positive effect of card use on the performance of VAT.FindingsThe analysis confirms that a higher share of card payments in private consumption increases VAT revenue and the efficiency of revenue collection. Higher gains are estimated for countries with above average self-employment.Originality/valueThe contribution of the paper is twofold. First, to our knowledge it provides the first confirmation of the well-established literature on information trails using aggregate macroeconomic time series in a multi-country setting. Second, it has very timely policy implications, as low-hanging fruit are identified in euro-area economies with much to gain from strengthening the credibility of their fiscal performance, such as Greece.