The Impact of Plastic Money Use on VAT Compliance: Evidence from EU Countries

Abstract

This paper examines the impact of credit and debit card usage on VAT compliance using annual national level data for 26 European Union countries from 2000 to 2016. Exploiting spatio temporal variation in plastic money use along with an instrumental variables approach, we find that a 1% increase in card payments reduces VAT gaps 0.51 percentage points whereas a 1% increase in cash withdrawals increases VAT gaps by 0.6 percentage points. Our contribution lies in using more adequate measures of VAT compliance gap and in accounting for potential confounders such as the ex-ante enforcement capacity of tax administrations.