VAT Evasion in Bulgaria: A General-Equilibrium Approach

Aleksandar Vasilev

Abstract


This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a nondifferentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than onefourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion.

Keywords


VAT evasion, general equilibrium, Bulgaria

Full Text:

PDF

References


Angelopoulos, K., Economides, G., and V. Vassilatos. (2011) "Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico," Review

of Economic Dynamics 14(3): 511-531.

Angelopoulos, K., Philippopoulos, A., and V. Vassilatos. (2009) "The Social Cost of Rent-Seeking in Europe," European Journal of Political Economy 25(2): 280-299.

Alvarez-Martinez, M. and Polo, C. (2014) "A General Equilibrium Evaluation of Tax Policies in Spain During the Great Depression," Revista de Economia Aplicada 65: 99-115.

Boev, V., and Boshnakov, V. (2008) "Grey economy and corruption in Bulgaria: Empirical Evidence," Proceedings from the 4th International Conference "Development: Cooperation

and Competitiveness", 22-24 May, Bucharest, Romania.

Bulgarian National Bank (2015) Bulgarian National Bank Statistics. Available on-line at www.bnb.bg. Accessed on Oct. 21, 2015.

Bye B., Strom, B. and Avitsland, B. (2015) "Welfare eects of VAT reforms: A general equilibrium analysis," Central Bank of Norway, Mimeo.

De Melo, J., Roland-Holst D., and M. Haddad (1992) "Tax Evasion and Tax Reform in a Low-Income Economy: General-Equilibrium Estimates for Madagascar," World Bank Policy

Paper 918, Washington DC.

European Commission (2014) Special Eurobarometer 402: Undeclared Work, Brussels: European Commission.

Kehoe, T. J., Noyola, P.J., Mandresa, A., Polo, C., Sancho, F. (1988) "A General Equilibrium

Analysis of the 1986 Tax Reform in Spain," European Economic Review 32: 334-342.

National Statistical Institute (2015) Aggregate Statistical Indicators. Available on-line at www.nsi.bg. Accessed on Oct. 21, 2015.

Pashev, K. (2006) "Fighting VAT Fraud: The Bulgarian Experience," Center for the Study of Democracy Working paper 0606/2, Sofia, Bulgaria.

Philip, L.R. (2014) "The grey economy of post-communist new EU member states: case of Bulgaria," Horizons of Politics, Vol. 5, No. 13, 91-112.

Vasilev, A. (2013) "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," SIRE Discussion Paper 84, St. Andrews, Scotland.

Vasilev, A. (2015a) "The flat tax reform in Bulgaria and the size of the informal sector," Economic Change and Restructuring, 48(2): 169-185, May.

Vasilev, A. (2015b) "Welfare effects of flat income tax reform: the case of Bulgaria," Eastern European Economics 53(2): 205-220, July.

WDI (2015)World Development Indicators. Available on-line at www.worldbank.org/data/wdi. Accessed on Oct. 21, 2015.




DOI: http://dx.doi.org/10.5202/rei.v8i2.243



E-ISSN 2038-1379 -  2009-2024 University of Perugia