Value Added Tax Gap in the Czech Republic

Abstract

The paper deals with an estimation of tax evasion of value added tax in the Czech Republic during 2006–2012. For the estimation I have used the concept of tax gap which is based on a comparison of the theoretical tax liability in the economy with the actual tax receipts. According to my results the VAT gap in the Czech Republic gradually increased during the observed period and it is more than CZK 100 billion in the last three years. The most significant growth of VAT gap occurred between the years 2007 and 2008 and between 2011 and 2012 when the reduced VAT rate was increased by 4 percentage points. The second part of the paper focuses on impact of my estimates on tax policy of the Czech Republic. I discuss two different possibilities how the additional revenue gained from VAT gap reduction could be used – either to decrease the government deficit and therefore to meet the Maastricht criteria or to decrease tax burden on labour which influences particularly low income workers.