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The Impact of Plastic Money Use on VAT Compliance: Evidence from EU Countries

Amakoe D. Alognon, Antonios Koumpias () and Jorge Martinez-Vazquez ()
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Amakoe D. Alognon: International Center for Public Policy, Department of Economics, Andrew Young School of Policy Studies, Georgia State University

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: In the recent decades, several countries around the world have implemented cash restriction policies to incentivize the use of electronic means of payments with the aim to combat money laundering, terrorism financing, and tax evasion. This paper examines the impact of the proliferation in credit and debit card usage on consumption tax compliance using annual national level data for 26 European Union (EU) member states from 2000 to 2016. We measure consumption tax compliance using estimated Value-Added Tax (VAT) gaps, defined as the difference between the theoretical VAT liability according to the law and actual VAT collections. We exploit variation in time and space of credit and debit card usage across 26 EU member states from 2000-16 using panel data and instrumental variable techniques. We find that plastic money use significantly reduces tax evasion while cash withdrawals appear to noticeably widen the compliance gap. This paper contributes to the literature on the effect of modern means of payment on tax compliance by using a more adequate measure of the VAT compliance gap compared to earlier works and by accounting for potential confounders such as tax policy choices and ex ante enforcement capacity of tax administrations to curb the gap.

Pages: 32 pages
Date: 2020-03
New Economics Papers: this item is included in nep-eec, nep-iue and nep-pay
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Journal Article: The Impact of Plastic Money Use on VAT Compliance: Evidence from EU Countries (2021) Downloads
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