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What drives consumption tax revenues?: Disentangling policy and macroeconomic drivers

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  • Hannah Simon
  • Michelle Harding

Abstract

This paper decomposes consumption tax revenues in OECD countries into the implicit tax rate (ITR) and consumption relative to GDP, to identify how economic downturns affect consumption tax revenues. It further considers the impact of changes in VAT efficiency and VAT rates on ITRs. The analysis finds that the observed stability in consumption tax revenues results from offsetting changes in the ITRs and in consumption as a share of GDP, arising from both macroeconomic changes and intentional policy changes. During the economic crisis in 2007-2009, lasting changes in consumption patterns, notably increases in government spending and in private consumption of necessity goods, adversely affected the efficiency of VAT systems. These changes have not since been reversed, suggesting that consumption tax revenues are now less robust to economic shocks. Broadening the VAT base and narrowing the scope of reduced rates can help to stabilise consumption tax revenues during economic downturns.

Suggested Citation

  • Hannah Simon & Michelle Harding, 2020. "What drives consumption tax revenues?: Disentangling policy and macroeconomic drivers," OECD Taxation Working Papers 47, OECD Publishing.
    • Handle: RePEc:oec:ctpaaa:47-en
    DOI: 10.1787/94ed8187-en
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    Cited by:

    1. Rafal M. Szewczyk, 2021. "COVID-19 and its Impact on VAT Gap in the EU: Lessons from and for Poland," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 3), pages 655-666.
    2. Francesco Berardini & Fabrizio Renzi, 2022. "Mind the Gap! The (unexpected) impact of COVID-19 pandemic on VAT revenue in Italy," Questioni di Economia e Finanza (Occasional Papers) 669, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Consumption Taxes; Economic crisis; Implicit Tax Rates; Macroeconomic changes; Tax Revenue Stability; Tax Revenues; Value-Added Tax; VAT efficiency;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other

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