Abrupt fall and recovery of rocket. That was more or less what happened to tax collection during the pandemic and the following years: tax revenue plummeted more than the economy in 2020, but quickly returned to growing well above GDP figures, a decoupling to which many factors have contributed , not all well identified. On the one hand, the improvement of activity and strong job creation; on the other, the push of inflation. But there is a part that escapes these dynamics, and that would be linked to the emergence of the underground economy as a result of the health crisis. In the case of VAT, specifically, the reduction in fraud would have provided some 6,000 million more in both 2022 and 2023, as calculated by the Treasury inspector Francisco de la Torre in a study published this Thursday by Esade EcPol.
After a double-digit GDP collapse in 2020, activity grew again by 6.4% and 5.8% in the following two years, in which tax collection advanced by 15.1% and 14.4% without major regulatory changes being undertaken. The Bank of Spain had already focused on this gap and the so-called positive tax residuals, that is, that part of the increase in tax revenue that is not explained either by fiscal measures or by the evolution of the tax bases, alleging the “ignorance ” about the phenomenon.
It is true that something similar had happened in the years prior to the bursting of the real estate bubble, but current circumstances rule out that the increase in revenue is linked to a fictitious warming of the housing market, as pointed out by De la Torre, who analyzes the evolution of the VAT between 2019 and 2023 based on a new method of estimating the underground economy, called EVADE (Evading Value Added Duty Economy) and developed by economists Pappadà and Rogoff (2023).
Like the entire collection, VAT revenue grew much more than the economy in 2021 and 2022, 14.5% and 13.9%, respectively, despite the reductions that were approved in the tax due to the crisis energy. “Part of this effect is inflation. But not everything,” says the report, titled Did tax fraud and the underground economy reduce after the pandemic? 2019-23 analysis based on VAT collection. In this, the Treasury inspector compares the final consumption of households subject to VAT – with data from the Tax Agency for company and customs declarations – with the final consumption expenditure estimated by the INE, with small adjustments so that the comparison is homogeneous – 88% of the final consumption of households in Spain is taken into account because the information from the Treasury does not include the provincial territories, nor Ceuta and Melilla.
With this data at hand, the percentage of the expenditure recorded by the treasury over the INE is calculated. The percentage falls in 2020, but rebounds in the following years and reaches over 70%, compared to 63.9% at the beginning of 2019. “The latter indicates better tax compliance, and is one of the reasons why it increases collection,” summarizes the report. Among the reasons behind this turnaround, he lists “structural social” changes such as increased card payments, a pattern corroborated by data from the Bank of Spain.
To reach the 6,000 million mentioned at the beginning, we must go to the collection and the tax bases. In 2019, the VAT accrued was 74,321 million – what was actually received was somewhat lower, because non-payments and deferrals are subtracted -, about 12,200 million less than in 2022. The tax bases of the tax, considering only those that correspond to the consumption of households, were some 71,000 million higher in 2022 compared to the pre-pandemic era – 475,000 million, 65.4% of the total, compared to 404,076 (71.6%) – which would mean an increase in collection of 10,830 million at the rate average cash in 2019, slightly higher than in 2022.
“This amount is the sum of three effects, inflation, increase or decrease in consumption in real terms, and better tax compliance (fundamentally a decrease in the underground economy),” details De la Torre, who to determine the impact of better tax compliance calculates the difference in percentages of final consumption based on VAT, of 6.21 points. Of the 71,000 million difference, 41,142 million are due to more taxed consumption, and the rest, basically, to inflation. “If we apply the 2019 rate, 15.27%, to this difference in bases, the result is the increase in revenue derived from better tax compliance and the reduction of the underground economy that would amount to about 6,282 million euros, somewhat less than the half of the improvement in VAT collection between 2019 and 2022, if we do not take into account the VAT reductions in 2022,” the document breaks down.
The report concludes that the two major elements that explain the “positive tax residuals” are the effect of inflation on personal income tax, since the Government did not deflate the state part of the rate and cold progressivity occurred. On the other hand, there is the reduction of the underground economy, which in the case of VAT is reflected in an increase in the percentage of operations “subject and declared” in the major consumption tax. ”This unexpected growth seems to be peaking, but it has been consolidated,” summarizes the report.
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