Monday, 29 August 2011

VAT gap in Portugal

Not too long ago, a blogger suggested that an increase in the VAT rates would not generate the expected tax revenue because of tax fraud. As I had no clue on the real severity of VAT tax evasion in Portugal, I had to spend sometime documenting myself.

Well, according to this study commissioned by the European Commission, Portugal behaves quite well with a VAT gap of 4%. The VAT gap (the gap between actual and theoretical revenues) is not a direct measure of fraud, just an upper bound. For details I defer the interested reader to the report that covers the period 2000-2006. The time series dimension is of some interest as it is probable that the gap increases during recessions. In any case, international markets should welcome Portuguese diligence.


  1. Even though I am pro higher and progressive VAT taxes (not as currently is being attempted because it will put more burden on lower middle class families, e.g. VAT on margarine increases from 6 to 23% and on golf decreases from 23 to 6%) as a way to promote more effectively household savings (e.g. compared to complex tax benefits on retirement accounts) and social justice (e.g. it could boost tax revenues from the wealthiest, especially given the current loopholes in the tax system), I am afraid that such measure would demand too much from international cooperation and coordination in order to avoid the booming of the shadow economy, and on the other hand, political courage to increase VAT in luxury items (the main campaign sponsors would not be happy). Nonetheless, something has to be done but increasing VAT as it has been done so far might further ignite social unrest and economic disruption. Why not eliminate tax loopholes for the wealthiest (e.g. Mankiw’s suggestions for the US economy), increase the upper IRS rates, lower VAT (except for luxury goods), increase capital controls for fiscal paradises? After all, speculation has driven the economic turmoil and the lower middle class are not the majority of those players.

    On the other hand, the literature usually reports that the size of the shadow economy in countries like ours, Italy or Greece is larger when compared to France, Germany or Austria. However, the exact figures are not really known. Hence, I am afraid that RECKON’s estimate of the Portuguese VAT gap could have a significant downward bias as the study heavily relies on the following assumption (p. 74): "We assume national accounts are complete in the sense that they capture all economic activity, including the shadow economy. ESA 95 requires this to be the case but they do not spell out the method statistics offices should follow. Our assumption is that the method that is followed be each statistics office, whatever it might be, is one that adequately captures the shadow economy."

  2. @Genes

    - on the shadow economy: I see no reason for the downward bias to be larger in Portugal than, say, in Italy or Greece. Conditional on the measurement of the shadow economy, the gap in Portugal is much lower than in many other countries.

    - regarding golf and other export services (very important for Portugal trade balance), one solution could be to treat them as "export goods" and have VAT rebated. A Portuguese golf player would pay VAT but a British golf player would not. This is obviously more difficult for certain categories of services such as restaurants. (maybe a tourist card would do the trick)

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