Value-Added Tax: Portuguese Experience and Anticipated Impact on the Greek Tourism Industry

Abstract

This paper estimates the impact of the recent 10% VAT increase on Greek tourism industry, the effect on firm profitability and probability of firm survival by testing the consequences of an equivalent VAT change in Portugal. The analysis is divided into 3 periods: before and after the VAT hike, and during the financial crisis with the total time period from 2003 to 2013. The sample is composed of 23,388 Portuguese and 4,969 Greek unique firms with 5.1 and 6.9 year-observations per firm for Portugal and Greece, on average and respectively. The results show that the increase of VAT from 13 to 23% will lead to a negative scenario with the effect even more dramatic than the recent financial crisis. The equivalent 10% VAT raise in Portugal caused a significant decline in firm profitability, an average drop of 9.4% compared to 1.15% during the financial crisis, a massive increase in the number of inactive firms and amplified the likelihood of firms to become bankrupt by 3.063 times. Such consequences will inevitably affect unemployment and will cause a slump in tax revenue in the long run. Hence, this research has wide practical and academic implementation and should be considered by the Greek and Portuguese government before taking a next step of interventions in the tourism sector.