Understanding the efficiency and welfare costs of value-added tax (VAT)

Professor Ben Lockwood recently published a working paper and VoxEU column on research around policy making and value-added tax (VAT).

In the paper, Professor Lockwood looks at how in the wake of the financial crisis, many governments have tended to turn to VAT to fill in the hole in the public finances, either by increasing the standard VAT rate or lowering the registration threshold.

The UK’s threshold of £81,000 is the EU’s highest, and is perceived as a way for the government to reduce the compliance costs of small businesses not wishing to register for the VAT.

In his research, Professor Lockwood says:

In the UK, compliance costs for a firm with turnover at the VAT threshold are estimated to be around 1-2% of turnover, and the cost may be higher in other countries.

Thus, a key question to inform policy-making is how the VAT itself and, in particular, the registration threshold affect the behaviour of small firms.

We aim to understand the efficiency and welfare costs of VAT by analysing three important, behavioural responses to the registration threshold: voluntary registration, bunching, and growth effects.

You can read more via the paper for Voxeu; a research-based policy analysis and commentary from leading economists website, or by reading the full paper.