Despite common misconception, the European Union does indeed allow member states to decide\u00a0their own rates of VAT on a number of categories of goods and services.\u00a0In 2009 the EU amended this Directive to allow all member states to permanently reduce VAT to 5%\u00a0on the renovation of private dwellings, excluding materials. Therefore EU rules are not a barrier to\u00a0the UK government choosing to apply a reduced rate of VAT on this type of work.<\/p>\n
But, since the new VAT law was introduced in Albania in 2015, the discussion of the economic\u00a0operators from tourism sector and also for other utilities that are used from the broad base of\u00a0consumers are asking for the reduction of VAT standard rate.\u00a0But is possible for the Albanian government to make and manage an reduction of VAT rate for some\u00a0of the most important basic needs?<\/p>\n
In this regard we want to explore the effects of a temporary cut in VAT, identifying three possible\u00a0effects:<\/p>\n
– an income effect as people benefit from a lower cost of living during the period of the\u00a0reduction,<\/p>\n
– a substitution effect as people bring their consumption forward, and\u00a0<\/p>\n
– an arbitrage effect as people buy non-perishable goods before the end of the period of low VAT for consumption after the VAT rate as been raised.<\/p>\n
International evidence suggests a clear overall impact on consumption, although the nature of the\u00a0pattern depends on the way in which the data are analyzed. However, the key policy issue is the\u00a0impact of the VAT change on output and to examine that a simulation model of the whole economy\u00a0is needed.\u00a0<\/p>\n
The reduction in VAT from 20% to 15% is likely to result in consumption being augmented by 1-2 per\u00a0cents by the year 2017, if the changes will take place in the mid of the year.\u00a0However, GDP is likely to be raised by less 1 per cent relative to what would have happened without the VAT increase. After the temporary reduction is over both consumption and GDP are depressed as a result of the policy.<\/p>\n
Is this political decision so harmful for the economy and state budget?<\/p>\n
Let\u2019s see some evidences of consumption trends from EU countries and after to make a logical\u00a0comment based on these facts.<\/p>\n
Households account for 60 % of all VAT liability across the EU-27 countries. The average EU-27\u00a0household faces a VAT bill that amounts to 11 % of their total expenditure. This ratio is highest in\u00a0Romania and Hungary (17.8 % and 17.5 %), followed by Latvia (15.3 %), Lithuania (14.7 %) and\u00a0Slovakia (13.7 %). Households in Luxembourg (6.2 %), Cyprus (6.8 %), Spain (7.2 %), the Netherlands\u00a0(7.7 %) and the United Kingdom (8.0 %) face the lowest VAT bill as a proportion of expenditure.\u00a0<\/p>\n
In most countries, the largest part of private households\u2019 VAT bill relates to goods and services\u00a0belonging to the category \u201cTransport\u201d: Expenditure on the purchase and use of vehicles is high and\u00a0usually taxed at the standard rate. In those countries where food is taxed at the standard rate, VAT\u00a0paid on food and non-alcoholic beverages is substantial.\u00a0<\/p>\n
Expenditure on housing and energy is usually taxed far below the standard rate. However, as\u00a0expenditure on housing is an important part of total expenditure, VAT payments relating to these\u00a0categories are high in many countries.<\/p>\n
In all countries, high-income households pay more VAT than low-income households in absolute\u00a0terms. The largest gap is in Luxembourg, where the highest income quintile pays seven times more\u00a0VAT than the lowest income quintile and the smallest gap in the Czech Republic, Austria and the\u00a0Netherlands.\u00a0Looking at VAT bills as a proportion of total expenditure, seems that Hungary to be the only country\u00a0with a regressive system (low-income households face a higher VAT burden as a fraction of total\u00a0expenditure than high-income households).\u00a0The VAT system in 11 countries (Spain, Romania, Bulgaria, Lithuania, Slovakia, Estonia, Greece,\u00a0Austria, the Czech Republic, Cyprus and Latvia) is approximately proportional: that is, all income\u00a0quintiles pay roughly the same share of their expenditure in VAT.<\/p>\n
On the other hand, a progressive system in the United Kingdom, Luxembourg, Italy, Belgium, Poland,\u00a0Malta, Slovenia, Finland, Ireland, Denmark, Sweden, Portugal, France, the Netherlands and\u00a0Germany.\u00a0Poorer households tend to spend a larger share of their income on consumption than wealthier\u00a0households, who tend to have a higher savings rate. As a consequence, VAT payments\u00a0 disproportionally burden households at the bottom of the income distribution.\u00a0The reduced rates therefore work to redistribute purchasing power from richer to poorer\u00a0households.<\/p>\n
Coming back in Albania, based in the facts from the EU countries we should say that consumption\u00a0will not be very sensitive to short-term fluctuations in income, because many consumers will add to\u00a0or draw down their savings to smooth their consumption, and others may be able to repay or add to\u00a0their debts in order to do so.\u00a0<\/p>\n
The argument that there is no income effect is that, with perfect capital markets, it makes no\u00a0difference to consumers at what point in their lives income is received. Since the government faces\u00a0an inter-temporal budget constraint, a tax reduction has to be offset by higher taxes in the future,\u00a0so, if everyone including the government faces the same interest rate, consumers receive no\u00a0 discounted net addition to their income and, on these grounds there should not be any income\u00a0effect. This is a form of Ricardian equivalence.<\/p>\n
There are a number of objections to this argument. Some consumers are borrowing constrained, and\u00a0hence there will be an income effect from a temporary VAT cut. It is also clear, that borrowing\u00a0constraints rise very strongly during a financial crisis. Hence in order to evaluate the impacts of the\u00a0recent temporary cut in VAT in the UK it is necessary to estimate the proportion of consumers who\u00a0 might be currently borrowing constrained.<\/p>\n
Obviously, the effect of a temporary VAT change depends on the extent to which businesses pass on\u00a0the change to consumers. If the change is not passed on the income effect is likely to be delayed\u00a0since it appears in profits rather than real wages.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"
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