The Effective VAT Rate and the VAT Gap
Asian Tax Journal Vol. 17 No. 4 (2016), pp. 189-232
Abstract
VAT exemption system would have the economic means to alleviate the VAT burden for daily necessity. Without this component the consumption tax system would be regarded strongly inferior compared to income tax system because of income regressive burden of consumption tax. But on the other hand the exemption regime has serious adverse effects compared to the reduced rate scheme of european countries. The purpose of this study is to estimate the effective tax rate of the value added tax of Korea and the three major European countries (UK, Germany, France) with industrial input－output data. In Studies it seems generally not to have a model structure, by which the inefficiencies of the VAT－Exemption scheme can be estimated. VAT gap between the nominal tax rate and the effective tax rate in Korea is larger and also efficiency cost was greater than those of European countries. This is because the VAT system used widely exemption system in Korea as compared to the 3 European countries. To regard Korean System with the wider range of VAT－exemption items compared to other European countries as a careful VAT System for middle and low income level residents is not appropriate. In these 3 european countries are some items of the reduced rate of VAT available, which generally is preferable for the middle and low income level residents due to its tax refund and small cumulative effect than tax－exempt system. But on the other hand it is hard simply to compare Korea with these 3 european countries, because these countries generally have higher level of living standard than us and therefore proportion of life necessities is greater than those countries in national economic output. 2011, the VAT Gap is about 48% in Korea and 2013 41%. Such large－scale VAT Gaps are also resulted from the analysis in the 3 European countries. The results of this analysis tells us that all of 3 major EU countries have much larger size of underground economy than we generally thought.
Keywords
- VAT
- exemption system
- effective tax rate
- VAT Gap
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