This article tries to present the major aspects concerning the value added tax in the context of economic crisis in European Union countries and Romania. The paper realizes an analysis of the impact of economic crises on VAT in the European space underlining the current situation when the revenues from VAT represent a valuable source of financing the public expenditures. In Romania the economic crises has led to increasing o f VAT rate from 19% to 24%. This measure is an important fiscal measure for the state budget and this study tries to reflect the impact of this VAT rate increase on the public revenues and consumption.value added tax, economic crises, tax revenues

Cuceu Ionut

Mara Cristian

Mara Eugenia Ramona

English

Research Papers in Economics

 
389 
VALUE ADDED TAX IN THE ECONOMIC CRISIS CONTEXT  
Mara Eugenia Ramona 
Babes-Bolyai  University  Cluj-Napoca  Faculty  of  Economics  Science  and  Business 
Admistration  
Cuceu Ionut 
Babes-Bolyai  University  Cluj-Napoca  Faculty  of  Economics  Science  and  Business 
Admistration  
Mara Cristian  
Babes-Bolyai  University  Cluj-Napoca  Faculty  of  Economics  Science  and  Business 
Admistration  
 
This article tries to present the major aspects concerning the value added tax in the context of 
economic crisis in European Union countries and Romania. The paper realizes an analysis of the 
impact of economic crises on VAT in the European space underlining the current situation when 
the revenues from VAT represent a valuable source of financing the public expenditures. In 
Romania the economic crises has led to increasing o f VAT rate from 19% to 24%. This measure 
is an important fiscal measure for the state budget and this study tries to reflect the impact of this 
VAT rate increase on the public revenues and consumption. 
 
Keywords: value added tax, economic crises, tax revenues 
 
Cod JEL: H23, H3, H22, G18. 
 
Introduction 
Value added tax is a key element of taxation system for many countries, an important and a 
reliable source of revenue for their budgets. For European Union countries VAT is assuring a 
significant part of the tax receipts counting 7% of GDP. Considering the share o f VAT receipt in 
total tax receipts the highest ratio is in Bulgaria 35% and the minimum is in Italy only 13% from 
the total tax revenues and for EU 27 as average is 17%.  
In times of economic crisis, the budget revenues are significantly affected by a sharp decrease. 
Many factors have an important contribution to this decline like: the tendency of some tax 
bases to contracts – incomes, profits, consumption; a decline in commodity prices and 
related revenues, or increasing the tax evasion. In this context for all EU countries a 
major issues is increasing the budget deficit and impossibility to financing the public 
expenditures. 
The significance of VAT has increased in the financial crisis as governments need to raise more 
revenue to reduce their national debt, but are reticent to raise direct taxes on labour or capital at a 
time  when  employment  and  investment  are  needed.  Personal  income  taxes increase  is  not  a 
solution, especially in the context in which Europe is confronted with aging of the population. 
However it is necessary to increase social contributions in this regard but this increase will not 
provide  budgetary  shortfalls.  On  the  other  side  increase  of  corporate  taxation  is  not  a  good 
solution for the crise time because may be a cause for deepening crisis. 
One way to improve the situation of public finances and increasing the tax receipts or at least 
maintaining at the same level like before the economic crises is through increasing the VAT rate. 
But  this  measure  requires  a  careful  assessment  of  the  possible  macroeconomic  and 
microeconomics effects. VAT rate increase is reflected in whole or in part on price of goods and  
390 
services. With an unchanged nominal wages, rising prices is clearly diminishing real income of 
households (reduction in purchasing power), thus affecting consumption. 
In the case of VAT, the most of the countries decide to increase rates, but also a high number of 
measures narrowing the base. Base narrowing was in many cases linked to equity considerations, 
as  some  countries  reduced  the  tax  burden  on  food  or  necessities.  Generally,  however,  the 
measures increasing the standard VAT rates have had a much larger (positive) budgetary impact 
than the base narrowing measures; for the cases for which we have information, the ratio is 
almost 5:1 (Taxation trends in EU, 2010). 
The impact of high VAT rates on consumer prices is not necessarily immediately, depending on 
many factors, including: the market rank for suppliers, the degree of competition, the elasticity of 
demand. Thus, firms from some industries prefer on the short term, may not fully pass on prices 
the  VAT  rate  increased;  the  result  is  decreasing  its  profits  to  avoid  reduction  in  demand, 
especially when they do not hold a significant position in the market, competition is strong and / 
or demand is very elastic. 
The increase in VAT rate with only a few percentage points is unlikely to register a significant 
reduction in consumption, but on the other hand can increase VAT receipts for the state budget. 
Normally,  any  VAT  rate increase  can lead  through  higher  prices  to increasing  inflation,  yet 
inflation is only a temporary shock. 
Increase VAT rate may influence the degree of regressive tax against current income households 
(VAT  is  a  regressive  tax  against  current  income;  current  income  decreased  its  share  in  the 
growing income). If, in addition to the standard rate of VAT, a reduced rate of VAT is applied for 
some consumption goods prevailing in low-income households, an increase for standard VAT 
rate would reduce the VAT regressivity and an increase for reduced VAT rate would lead to a 
higher regresivity. However, if there is a single VAT rate, the increase does not change the 
degree of regressive tax, according to the size and structure of consumption will not change.  
A single rate of VAT means that the VAT payments by low-income households will be a higher 
proportion of their incomes than payments by higher income households. VAT is not regressive 
if tax payments are expressed as a percentage not of income but consumption. If consumption is 
used as the denominator, then by definition the impact would be proportional. 
The  tax  burden  of  a  VAT  levied  at  uniform  rate  would  also  be  largely  proportional  if  the 
denominator  is  lifetime  income  instead  of  annual  or  current  income  because  many  income 
recipients are only temporarily in the lower income brackets. However, the main role of value 
added tax revenue is assuring the tax receipts for the state budget and not to achieve efficient 
redistribution of income in society; it is the quality of other taxes. 
The  VAT  rate  increase  would  leave  a  negative  impact  on  the  inhabitants  purchasing 
capacity  and  the  economy  in  general  through  decreasing  of  the  consumption.  But  the 
negative of VAT rate increase will be felt also on the business activities. The increasing of VAT 
rate means inevitably results in the drop in consumption, and the consumption decline has a 
significant  impact  on  the  economy  in  general.  During  the  economic  crisis  conditions  it  is 
important to promote the consumption increase. 
 
VAT in European Union countries 
Since 2009, under conditions of economic crisis, many European Union member states have 
resorted to increasing the standard VAT rate. 
 
    
391 
 
Table 1. VAT rats increases in EU countries  
Country  Standard 
VAT rate 
increase 
Old 
standard 
VAT rate 
New 
standard 
VAT rate 
∆  of 
rate 
Czech Republic  01.01.2010  19%  20%  1% 
Estonia  01.07.2009  18%  20%  2 
Greece  15.03.2010  19%  21%  2 
01.07.2010  21%  23%  2 
Spain  01.07.2010  16%  18%  2 
Latvia  01.01.2009  18%  21%  3 
01.01.2011  21%  22%  1 
Lithuania  01.01.2009  18%  19%  1 
01.09.2009  19%  21%  2 
Hungary  01.07.2009  20%  25%  5 
Poland  01.01.2011  22%  23%  1 
Portugal  01.07.2010  20%  21%  1 
01.01.2011  21%  23%  2 
Romania  01.07.2010  19%  24%  5 
Slovakia  01.01.2011  19%  20%  1 
Finland  01.07.2010  22%  23%  1 
UK  01.01.2010  15%  17,5%  2,5 
04.01.2011  17,5%  20%  2,5 
Source: European Commission  
 
Currently,  the  standard  rates  of  VAT  charged  by  the  EU  Member  States  are  between  15% 
(Cyprus  and  Luxembourg)  and  25%  (Denmark,  Sweden  and  Hungary),  with  an  average  of 
20.7%. It is standard practice ten different levels, being the dominant share of 20% share. It 
complies with the minimum of 15% imposed by the European Commission but not required and 
a maximum limit not achieved a significant near standard VAT rates applied by all Member 
States.  
Figure 1. VAT standard rates in EU countries 
 
Source: European Commission 
Although differences between the standard rates of VAT applied by some Member States are 
quite high (ranging up to 10 percentage points), there is some convergence of these shares, so 11 
25%
24%
23%
22%
21%
20%
19.6%
19%
18%
15%
15% 20% 25%
DK,HU,SE
RO
FI,GR,PL,PT
LV
BE,IE,LT
AT,BG,CZ,EE,IT,SK,SI,UK
FR
DE,NL
ES,MT
CY,LU  
392 
of the 27 countries using the standard rate between 19% and 20%. For instance, France has a 
VAT standard rate of 19.6% and two reduced rates. A reduced rate of 5.5% is applied to the 
absolutely  necessary  products  and  on  the  restaurant  services  and  the  reduced  rate  2.1%  for 
newspapers, plays and approved medicines (Sabau-Popa & all, 2010). 
 
Current situation of VAT in Romania 
In Romania, VAT receipts recorded in the last quarter of 2008 were only 0.6% higher in nominal 
terms than revenue in the fourth quarter of 2007, the conditions under which started to manifest 
in our country financial and economic crisis. It should be noted that although in the last quarter of 
2008 saw a economic growth of 2.9%, final consumption fell in real terms than that registered in 
the fourth quarter of 2007 by 2.8%, while final household decreased by 4.7%, due to reduction in 
sales volume of retail goods and services rendered (Institutul Naţional de Statistică, 2009). 
 
Figure 2. VAT receipts in Romania, 2007-2010, quarterly 
 
Source: own calculation based on Finance Minister Data 
 
Value added tax collected in 2008 was 30.8% higher in nominal terms, than that received in 
2007, provided that, in real terms, household final consumption increased by 9.2% , Consumption 
increased by 8% and gross domestic product grew by 7.1%. 
 
Figure 3. VAT receipts in Romania, 2007-2010, annually 
 
Source: own calculation based on Finance Minister Data 
 
In 2009, there was a significant decrease in revenues from value added tax compared to 2008. 
They have decreased by 16% in nominal terms, due to real decrease of final consumption of 
31243.2 
40875.1 
34322.4 
39246.0 
0.0 
5000.0 
10000.0 
15000.0 
20000.0 
25000.0 
30000.0 
35000.0 
40000.0 
45000.0 
2007  2008  2009  2010 
mil. lei 
0
2000
4000
6000
8000
10000 
12000 
14000 
Quarter I  Quarter II Quarter III Quarter IV
mil. lei
2007 2008 2009 2010 
393 
households  with  10.8%  and  total  final  consumption  decrease  with  8.2%  and  7.1%  of  gross 
domestic  product  (Institutul  Naţional  de  Statistică,  2009).  VAT  receipts  recorded  in  2010 
exceeded 14.3% in nominal terms comparative with 2009, while the standard rate of VAT was 
increased in July 2010 by 5 percentage points amid economic downturn mitigation (in terms real 
gross domestic product fell by 1.3%, consumption fell by 2.1% and household final consumption 
decreased by 1.6%) (Institutul Naţional de Statistică, 2009). Value added tax collected in 2010 
was lower, in nominal terms, than that received in 2008 by 4%. 
 
Figure 4. VAT as % of GDP in Romania and EU in economic crises 
 
Source: Based on Eurostat data 
 
Concerning the evolution of VAT as % of GDP in Romania and EU 27 in the economic crises 
time we can see that  for EU there is a constantly evolution with slight fluctuations between 6 and 
7 % of GDP. The increasing of VAT rate in Romania has a significant impact on the tax receipts 
because  there  is  a  continuously  increase  of  the  share  of  VAT  receipts  in  GDP  for  2010. 
Following this trend we can say that the rate increase was felt in the budget favorably 
even if the purchasing power of consumers has been affected. 
 
Table 1. Evolution of households’ expenditures and VAT as % in GDP 
VAT % GDP  Q4  Q3  Q2  Q1 
2010    8.42  7.74  7.22 
2009  5.96  5.6  8.36  7.19 
2008  6.41  8.68  7.59  9.01 
Final consumption 
expenditure 
of households % GDP 
Q4  Q3  Q2  Q1 
2010    57.8  62.2  66.9 
2009  58.8  57.1  63.5  67.8 
2008  58.2  60.1  67.4  74 
Source: Source: Based on Eurostat data 
 
Following the correlation between consumption and the VAT for the economic crises  there is a 
direct correlation, if the consumption increase with 10% than the VAT receipt increase with 1%. 
The VAT receipts are correlated with consumption –in this case only household consumption 
with 23%. 
 
 
 
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
2009Q1
2008Q4
2008Q3
2008Q2
2008Q1
2007Q4
%
 
G
D
P
Romania EU27 
394 
 
Figure 5. Correlation between consumption and the VAT for Romania 
 
Source: own calculations based on Eurostat data 
 
Conclusions 
In conditions of economic crisis the government may use the VAT to increase the tax receipts but 
not without macroeconomic consequences. With the emphasis on taxation is increasingly putting 
more on indirect taxes, value added tax can be considered a tax of the future, being by far the 
most important and largest indirect tax harmonization success tax. 
 
Annex 1 VAT in Romania, 2007-2010, millions lei 
  2007  2008  2009  2010 
January  1.803,8  4.671,2  4.295,4  3.188,0 
February  1.323,3  2.543,0  2.371,6  2.214,3 
March  1.747,4  3.050,0  1.868,5  2.154,6 
April  2.586,8  3.236,2  3.045,7  2.953,4 
May  2.725,9  3.486,9  2.741,2  2.692,1 
June  2.702,0  3.240,6  2.736,8  3.231,0 
Julie  2.894,8  4.083,6  2.748,9  3.220,4 
August  2.813,1  3.510,2  2.476,1  3.637,1 
September  3.137,2  3.485,0  3.040,7  3.890,0 
October  3.187,6  3.747,3  3.162,8  4.233,9 
November  2.770,6  3.066,3  2.693,2  3.896,9 
December  3.550,7  2.754,8  3.141,5  3.934,3 
1
st Quarter   4.874,5  10.264,2  8.535,5  7.556,9 
2
nd Quarter  8.014,7  9.963,7  8.523,7  8.876,5 
3
rd Quarter  8.845,1  11.078,8  8.265,7  10.747,5 
4
th Quarter  9.508,9  9.568,4  8.997,5  12.065,1 
Total  31.243,2  40.875,1  34322,4  39246.0 
Source: Finance Minister 
 
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VALUE ADDED TAX IN THE ECONOMIC CRISIS CONTEXT

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VALUE ADDED TAX IN THE ECONOMIC CRISIS CONTEXT

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