Abstract

The value added tax gap (VAT gap) is a notable indicator of tax evasion, tax avoidance and overall inefficiency within the tax system. As the VAT gap in Greece is one of the largest in the European Union (EU), an attempt to quantify and analyze it was made. In order to achieve that, social, economic, fiscal and tax factors were examined based on international literature, since there is very little relevant research in Greece. Particular emphasis was given to factors that revolve around tax administration, such as tax audits. Specifically, twelve factors were examined for a period of 21 years (between 1997 and 2018) using econometric models based on time series data. In addition, the VAT Gap was separated into two components; a gap arising from tax non-compliance (‘compliance gap’) and a gap arising from political decisions (‘policy gap’), for the purpose of properly analyzing the effects of the influential factors on the Greek VAT gap. The VAT revenue ratio (VRR) was used as the dependent variable in order to measure the Greek VAT Gap. The analysis revealed that five out of the total twelve explanatory variables examined greatly influence the Greek VAT Gap. Specifically, two of them, that is, the ratio of VAT to total taxes and the number of tax audits, have a negative correlation with the Greek VAT gap. The other three variables, namely the final government consumption expenditure, the difference between the standard and reduced VAT rates and the gross value added/gross domestic product ratio have a positive correlation with the Greek VAT gap. These findings can be potentially utilized by the authorities to limit VAT non-compliance and battle evasion.

Key words: Value added tax (VAT), VAT gap, VAT revenue ratio (VRR), tax administration, tax audits.