The Impact of Corruption and Poverty on VAT Gap in Central and Eastern Europe

Abstract

According to the recent statement (December 2021) of the EU Commissioner for Economic Affairs - Paolo Gentiloni ”Despite the positive trend registered in the last few years, the VAT Gap remains a major concern – particularly in view of the immense investment needs our Member States must address in the coming years”. VAT Gap is defined as the difference between the total theoretical VAT liability (VTTL) and VAT actually collected (VAT Revenue). Thus, as per the latest report of the European Commission (2021) within EU, in 2019, the VAT Gap reached around EUR 134 billion. Therefore, for the evaluation of the VAT Gap should be taken into account not only the economic context, but also the ethical, legal and other dimensions that affect the business environment, implicitly, society. More than 15 years after the great wave of enlargement of the European Union, the countries of Central and Eastern Europe are still facing several problems related to the functioning of the institutions. This article analyzes the impact of Corruption Perceptions Index (CPI) and People at risk of poverty or social exclusion (AROPE) on VAT Gap for Central and Eastern European countries. Our study covers 10 years (2009-2018), the period after the financial crisis. Within the study, we developed 3 econometric models, using panel data regression tested for fixed and random effects.

Keywords

• vat evasion
• vat gap
• corruption
• poverty
• social exclusion