AuthorMuresan, Mariana
  1. Introduction

    Fifty years ago, the Value Added Tax (VAT) was rarely heard outside of France and some specialized handbooks. Nowadays, it is found in over 130 countries where it commonly raises 20% or more of all tax revenues. Widely adopted in sub-Saharan Africa and elsewhere, it has been the centerpiece of the tax reform in many developing countries. By any standards, the rise of the VAT has been the most significant development in tax policy and administration of recent decades.

    Since the 1960s, VAT systems have been progressively adopted around the world. The majority of VAT regimes are characterized by a consumption tax base with multiple tax rates, multiple exemptions, and the credit method of tax liability calculation. These VAT characteristics have been incorporated in a number of studies on the incidence and economic effects of VAT. However, three important VAT characteristics have yet to be formalized in applied VAT research: multi production, legislated differences in exemption status, and industry-specific differences in the refund ability of VAT paid on inputs to production and investment. The need for careful and detailed treatment of these VAT characteristics is particularly important in disaggregated general equilibrium models. These models are recognized as well suited for the analysis of the efficiency effects of tax policies. The modeling of VAT within a general equilibrium framework raises a fourth issue not yet addressed in the VAT modeling literature. Even in highly disaggregated models, commodity and industrial definitions are, by necessity, aggregates of hundreds of commodities and industries, each with the possibility of distinct tax rates and exemptions under the relevant VAT statutes. Previous studies have assumed that a commodity is either exempt or taxed.

    Several decades ago, there have been numerous theoretical and empirical studies that attempted to investigate the relationship between taxation and economic performance and long-term economic growth. The theory of tax incidence or burden has been a central focus of public sector economics. There is a consensus that the analysis of tax incidence should be conducted within a general equilibrium framework.

    The theoretical tax incidence literature argues that if a tax affects the price of an accumulated factor of production (physical capital, human capital and technology) then this tax is distortionary. An increase in distortionary taxation discourages the economic activities and consequently lowers the growth rate of economic output.

    Recent papers on base broadening of the VAT have shown how traditional arguments in favor of a broadly based VAT at a low uniform rate can break down if there is an underground economy (Piggott and Whalley, 2001), household production with market provided inputs (Sandmo, 1990), labor (or all factors of production) is internationally mobile (Lockwood et all., 2002), or other non-traditional elements appear.

    There are two the key challenges for tax design that face almost all developing countries. The first is that of dealing with a large informal sector. Hard to measure, but put by Schneider (2002) at an average of around 40% of the gross national income in these countries, informality represents both a costly narrowing of the tax base and a potentially serious distortion of economic activity. The impact which informal economy has on the tax policy design made the subject of research for many scientists among which, the most notable ones are Piggott and Whalley (2001), Stiglite (2003), Munk (2008), Emran and Stiglite (2005), and, taking a somewhat different perspective, Gordon and Li (2005).

    The second challenge is determining the proper degree of reliance on trade taxes. These still account for 20% or (often) more of all tax revenue in many developing countries, so that continuing pressures towards further trade liberalization, combined with pressing revenue needs, raise the question of how reduced trade tax revenue can be replaced from domestic sources (Keen, 2008). What is troubling here is the emerging evidence which suggests that many low income countries (though by no means all) experienced difficulties in achieving such replacement in the past (Baunsgaard and Keen 2005).

    The effects of fiscal policy on economic growth have been the subject of long debates. With respect to short-term effects, a large body of empirical research, primarily for industrial countries, has been devoted to understanding under which conditions fiscal multipliers can be small (and even negative) (Alesina and Perotti, 1996; Alesina and Ardagna, 1998; Perotti, 1999).

    Perotti (1999), for example, shows that budgetary consolidations tend to be expansionary when debt is either high or it grows rapidly. Alesina et al. (1995) and Alesina and Ardagna (1998) find that, in addition to the size and persistence of the fiscal impulse, budget composition matters when it comes about differentiating all those private sectors which the fiscal policy is applicable to. Fiscal adjustments that rely primarily on cuts in transfers and the wage bill tend to last longer and can be expansionary, while those that rely primarily on tax increases and cuts in public investment tend to be constricted and unsustainable (Von Hagen and Strautch, 2001).

    The potential effects of fiscal policy on long-term growth have also generated substantial attention (Tanzi and Zee, 1996). The most recent research studies in the field of endogenous growth suggest that the fiscal policy can either promote or retard both the economic growth and the investments in human and physical capital. The last ones can be affected by taxes while investments can influence the governmental expenditure. Hence, the fiscal policy can influence certain variables which the economic growth depends on (Chamley, 1986; Barro, 1990, 1991; King and Rebelo, 1990; Barro and Sala-i-Martin, 1995; Mendoza et al., 1997).

    Several empirical studies deal with the relationship between VAT and a multilevel production leading to the conclusion that allowance efficiency effects depend on changes of activity across sectors with different rates of net indirect taxation (Giesecke and Nhi, 2010; De Mello, 2009; Lazarev and Pleshdinskii, 2007). Studies conducted by Christadl, Fetchenhauer and Hoezl (2011) examine the potential confirmation bias in price perception in consequence to a real-world event and different explanations for such a bias and suggesting that participants reported price increases that were significantly higher than the official price development and in line with an undifferentiated belief in market price increases.

    Summarizing, the emergence of value added tax stays on the movement of goods. Switching to VAT has made it possible to avoid cumulative taxation of goods movement. It is a unique tax that it is perceived in a fractionated way, corresponding to the added value for each stage of the economical circuit.

  2. The VAT evolution and its impact upon the economic activity in Romania

    In developing countries, especially in the case of Romania, the studies on the VAT emphasize the importance of the conditions under which a VAT is fully optimal (even though it is a tax on the informal sector of production which is restrictive): an efficient tax structure requires the development of both the VAT and the withholding taxes (Pantazi and Straoanu, 2011; Keen, 2008; Zee, 2008).

    The VAT was brought in Romania in 1993, its introduction being based on the following considerations: a) there was a need to replace the former tax applied on the commodity flow, and b) the purpose was to increase the resources of the state and to comply with the tax systems existing in the rest of the European countries.

    At the beginning, the flat tax was 18%. Later, the VAT system has undergone multiple rearrangements both from the point of view of the taxable operations and the tax subjects as well as from the point of view of the rates. In regards to the VAT regime change, we can mention that initially there were two rates, 18% and 9%, which were later increased to 22% and 11%. Then, the 19% flat rate was introduced; at the moment its value is 24%.

    According to the existent Tax Code from 2014, the standard VAT rate in Romania is 24% and it applies to the taxation base of those taxable transactions that are not exempted or not subject for the rate reduction.

    The reduced rate is 9% and it applies to the taxation base of the following services and/or commodities:

    * Services as granting access to castles, museums, memorial houses, historical monuments, etc.;

    * Delivery of textbooks, books, newspapers and magazines, excepting those intended exclusively or primary for advertising;

    * Delivery of prostheses and accessories of such, excepting the dental ones;

    * Delivery of orthopedic products;

    * Delivery of drugs for human or veterinary use;

    * Accommodation in the hotel sector, including the rental lands for camping; and

    * The delivery of the following goods (valid starting with the 1st of September, 2013):

    --All bread types as well as the following bakery varieties: baguettes, mini baguettes, mini bread and braided bakery;

    --White wheat flour, semi-white wheat flour, dark wheat flour and rye flour; and

    --Triticum spelta, common wheat.

    Starting from 2013, the VAT applicable to the basic agro-food products was reduced from 24% to 9%. This measure was taken even in other EU member states, such as Belgium and Germany, and it was meant to ensure the required social protection and the increase of the collection rate for the state budget. Also, there is a reduced rate of 5% applicable to the taxation base for the delivery of houses as part of the social policy, including the land on which the houses are built.

    Regarding the impact of VAT on the economic activity from Romania, we can assess that Romania data are striking. In 1999, Romania had the lowest effective tax report/tax formal throughout the region. The low income could...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT