The impacts of changes in the value added tax rate on the economy in EU countries

Abstract

Any change related to value added tax is perceived very carefully and sensitively, as it is a tax instrument that can ensure a significant increase or decrease in tax revenues in individual countries. To get to the heart of the operation of VAT means to gain more knowledge about the processes in the economy as such. The paper deals with the impact of changes in the VAT rate on the economy in the 28 countries of the European Union using selected macroeconomic determinants, such as VAT revenue, gross domestic product, consumption expenditure, exports and imports, with individual EU countries considered as a separate territorial unit. The monitored period was from 2004 to 2018. The aim of the paper was to evaluate the impact on the economy when changing the standard VAT rate using annual increments from quantified partial econometric models using linear regression analysis. To achieve this goal, the correlation coefficient was used, which determined the relationships between selected macroeconomic determinants and the VAT rate in the EU countries. The analysis showed that an increase in the standard VAT rate by 1 % will cause a decrease in annual increments compared to the real values of annual increments for selected macroeconomic determinants. Ultimately, this will have a negative impact on the economy in the short term, as it will slow down their growth. The most significant slowdown by 2.51 % was achieved in imports and, conversely, the least significant slowdown in consumption expenditure by 1.11 %.