Nikolaos Artavanis (Isenberg School of Management – UMass Amherst) argues, in a timely article given the current proposed increases in VAT, that VAT increases do not go hand in hand with tax revenue increases in the presence of tax evasion
In industries, where tax enforcement is challenging, the increase of tax rates does not necessarily correspond to an increase in public revenues. The reason is that these firms tend to “adjust” the magnitude of tax evasion to new policies. The increase of the VAT rate in the restaurant industry in September 2011 increased evasion by at least 9%, while the reduction of the rate in August 2011 reduced sales under-reporting by at least 9.6%. Taking into account the effect of the additional reported sales on direct taxes, the final fiscal outcome of the VAT rate reduction becomes minimal. Read the article.