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Traceable Payments and VAT Design: Effects on VAT Performance

Author

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  • Boryana Madzharova

Abstract

This article studies the role of cashless payments in third-party reporting for the purposes of value-added tax (VAT) compliance management. In economies with well-developed financial institutions, the traceability of digital payments could serve as a deterrent to sales suppression even in the absence of explicit policies utilizing electronic payments for tax enforcement. Using country-level data for the European Union, this article shows that a 1% increase in the value of payments made with cards to gross domestic product (GDP) improves VAT performance by 0.05–0.09%. This effect is found to be strongest in economies characterized by low level of trust in public institutions, and does not vary with the extent of third-party reported information used by tax administrations, or the presence of a large-scale VAT invoice matching system. The result is robust to a rich number of characteristics controlling for various aspects of VAT’s design.

Suggested Citation

  • Boryana Madzharova, 0. "Traceable Payments and VAT Design: Effects on VAT Performance," CESifo Economic Studies, CESifo Group, vol. 66(3), pages 221-247.
    • Handle: RePEc:oup:cesifo:v:66:y::i:3:p:221-247.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifaa003
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    Cited by:

    1. Antón, Arturo & Hernández-Trillo, Fausto & Ventosa-Santaulària, Daniel, 2021. "(In)Effective tax enforcement and demand for cash," Journal of Macroeconomics, Elsevier, vol. 70(C).

    More about this item

    Keywords

    VAT; cashless payments; VAT design; third-party reporting; tax administration;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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