The VAT gap as a limiting factor for economic development of the CEE countries

Abstract

Purpose and Originality: The aim of the study was to compare the VAT revenue growth and the GDP growth in the Central and Eastern European countries belonging to the European Union within the 2000-2016 to verify the VAT gap estimations made by European Commission. Method: To achieve the goal, an analysis of the strength of the correlation between the yearly changes in nominal GDP and the yearly changes in nominal VAT revenue in the Central and Eastern European countries belonging to the European Union within the 2000-2016 period was carried out (chain base indices). On the basis of the statistical analysis of data with the use of Pearson's correlation coefficients, an international comparison also with European Commission’s estimates was made with the use of the inductive reasoning methodology. Results: The results of conducted correlation analysis show very strong positive dependence between the yearly changes in nominal GDP and the yearly changes in nominal VAT revenue in the Central and Eastern European countries belonging to the European Union within the 2000-2016 period (chain base indices) in the case of 8 out of 11 CEE countries (Pearson’s r from 0.78 to 0.93) and strong correlation in the case of rest 3 CEE countries (Pearson’s r from 0.59 to 0.69). But it must be stressed that the assessment of these results must take into account changes in the VAT rates introduced in almost all CEE countries as the consequence of 2008 crisis. That’s why these very high Pearson's correlation coefficients between analyzed values seem to confirm a growing problem with VAT collection, though VAT rates were increased almost in all CEE countries (in some of them significantly). Society: The high and/or growing VAT gap especially in the case of less credible CEE countries with permanent state budget deficits, growing public debt and higher tax rates, increases instability of sources for public expenditures and increases risk premium, thus market cost of capital, i.e. has an effect on future investment level, entities’ creditworthiness, consumption level, the rate of debt growth and the rate of catchin-up process of the CEE countries and the rate of their social and economic development. Limitations: It must be stressed that the VAT gap analysis is based on estimates, incomplete data and adopted particular estimation method. Furthermore, the estimates of the VAT gap are updated and revised backwards every year, mainly because of updates in the underlying national accounts data published by Eurostat and corrections in estimation methods (for example revision of the parameters of the VTTL model used by European Commission; European Commission, 2017).