Understanding VAT Evasion and Fraud

• Applicant: Professor Dr. Thiess Büttner
• Subject Area: Economic Policy, Applied Economics
• Term: from 2017 to 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 323860631

-- The project seeks to combine expertise in theoretical, experimental and empirical research to address the following questions: What are the determinants of VAT evasion and VAT fraud? How effective are policy measures against it? Evasion arises if VAT is not charged on taxable business to consumer transactions. Fraud emerges if VAT charged on sales is not transferred to the tax authorities as the seller disappears, for instance, through forged bankruptcy without transferring the tax revenues to the tax authorities. VAT fraud often takes place in a business to business environment. -- By focusing on VAT, this project moves beyond the scope of traditional tax evasion research. By design VAT is an advanced tax instrument that generates information on the taxable base by two parties: buyers and sellers. Therefore, evasion and fraud induce interaction between agents at different stages of the value chain. The intricate interplay between timing of information, criminal collaboration, and collection gives rise to opportunities which are characteristic not only for VAT fraud but also for other types of modern tax fraud. Available statistics point at huge revenue losses.-- Despite the key role of VAT as a revenue source, the existing literature has not taken into account the different incentives for evasion and fraud along the value chain. Research is also lacking on the effects of measures against VAT evasion and fraud. To fill in this gap, the experimental research part of the project allows for a rigorous comparison of the effects of various policy interventions. The empirical research part of the project exploits actual tax reforms as quasi-experiments in order to evaluate the outcome of policies tackling VAT noncompliance.-- The research project does not only assess available options to designing taxes in ways that curb tax evasion. By implementing specific tax institutions in an experimental laboratory setting, it also explores the use of experimental research for solving practical problems in public policy, more specifically in taxation and tax administration. To our knowledge, this project constitutes the first rigorous experimental framework that compares different policy measures targeting the performance of the VAT system. The project combines experimental research with empirical analyses. This overlap of methodologies in addressing similar research questions is synergetic and permits a more comprehensive analysis that will be mutually advantageous for the individual parts of the proposed research project. -- The project also adds to the small literature studying tax issues using individual tax files for Germany. While some progress has been made in the data infrastructure with the introduction of research data centers (Forschungsdatenzentren) at statistical offices and research institutes, compared with other European countries and the US, empirical research on taxation using microdata in Germany is still hugely underdeveloped.

• DFG Programme: Research Grants