Relationship between VAT Revenue and Intermediate Consumption - A VAR Approach

Abstract

Abstract The paper analyzes the relationship between value added tax revenue and intermediate consumption in the case of Romania in the period January 2007 – September 2018 (quarterly data), using an unrestricted Vector Autoregression Model based on the rate of dynamic taxation’s level (in terms of value added tax revenue) and the rate of dynamic intermediate consumption. In literature, is questioned only the relationship between tax revenue and gross domestic product. Our study emphasizes the link between tax revenue and parts of the own tax base. The relationship is questioned in both directions, namely with respect to the manner in which value added tax affect intermediate consumption and in terms of the influence of intermediate consumption on value added tax revenue in the case of Romania. Given that a significant part of the corporate taxpayers have left the value added tax regime, intermediate consumption is considered instead of final consumption. The analysis is focused on a specific relationship in order to assess the general impact of indirect taxation on production capacity of the undertakings. Our findings reveal that there is not a direct relationship between intermediate consumption and value added tax revenue at the level of Romania despite a such relationship at the EU-28 level. Moreover, in the case of Romania a high volatility of intermediate consumption was found. Both the breakage between tax revenue and his tax base, and volatility of the tax base suggest an influence of hidden economy. For future concerns about tax policy development, a specific model for estimating and forecasting value added tax revenue should be developed for Romania. On the other hand, based on the findings of this study, a model can be developed to assess the impact of the hidden economy on the value added tax revenue.