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.

Cashless Payments and Tax Evasion: Evidence From VAT Gaps in the EU

“…The negative pattern is robust to a different specification (see Figure 8, based on Cattaneo et al (2019)). The negative relationship between VAT non-compliance and e-money usage we report is in-line with prior evidence in the literature (Hondroyiannis and Papaoikonomou, 2020;Madzharova, 2020;Alognon et al, 2021).…”

“…Early evidence in the literature identifies a positive impact of cashless payments on VAT compliance (Hondroyiannis and Papaoikonomou, 2020;Madzharova, 2020). Studies exploiting exogenous variation in the use of cashless payments find large improvements in VAT compliance but are either relying on instruments based on regional banking infrastructure differences or focusing on a single country (Hondroyiannis and Papaoikonomou, 2017;Immordino and Russo, 2018;Danchev et al, 2020;Alognon et al, 2021).…”

The Role of Socioeconomic and Female Indicators on Infant Mortality in West Nusa Tenggara: A Panel VECM Analysis

“…The VAR model is represented by Equation 6, where is a coefficient matrix with size , is a vector size , and is a vector of deterministic components. Meanwhile, if it is proven that there is cointegration, the modeling is done using the Panel Vector Error-Correction (PVEC) with the model indicated in Equation 2 (Hondroyiannis & Papaoikonomou, 2020). Once the PVAR/PVECM model is formed, the model's feasibility is tested by checking the autocorrelation of the residuals (Portmanteau residual test), the distribution of the errors (residual normality test), and the constancy of the error variance (White test).…”