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  • Author: Adam Śmietanka, Alejandro Esteller Moré, Grzegorz Poniatowski, José María Durán-Cabré, Mikhail Bonch-Osmolovsky
  • Publication Date: 10-2019
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: This Report has been prepared for the European Commission, DG TAXUD under contract TAXUD/2017/DE/329, “Study and Reports on the VAT Gap in the EU-28 Member States” and serves as a follow-up to the six reports published between 2013 and 2018. This Study contains new estimates of the Value Added Tax (VAT) Gap for 2017, as well as updated estimates for 2013-2016. As a novelty in this series of reports, so called “fast VAT Gap estimates” are also presented the year immediately preceding the analysis, namely for 2018. In addition, the study reports the results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). It also scrutinises the Policy Gap in 2017 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. In 2017, growth in the European Union (EU) continued to accelerate with a combined real GDP growth of 2.5 percent, providing a sound environment for an increase in VAT collections. As a result, VAT revenue increased in all Member States (MS). An increase in the base was the main, but not the only, source for growth. Increase in compliance contributed to an approximate 1.1% increase in VAT revenue. In nominal terms, in 2017, the VAT Gap in EU-28 MS fell to EUR 137.5 billion, down from EUR 145.4 billion. In relative terms, the VAT Gap share of the VAT total tax liability (VTTL) dropped to 11.2 percent in 2017 and is the lowest value in the analysed period of 2013-2017. Fast estimates for 2018 indicate that the downward trend will continue and that VAT Gap will likely fall below EUR 130 billion in 2018. Of the EU-28, the VAT Gap as percentage of the VTTL decreased in 25 countries and increased in three. The biggest declines in the VAT Gap occurred in Malta, Poland, and Cyprus. The smallest Gaps were observed in Cyprus (0.6 percent), Luxembourg (0.7 percent), and Sweden (1.5 percent). The largest Gaps were registered in Romania (35.5 percent), Greece (33.6 percent), and Lithuania (25.3 percent). Overall, half of EU-28 MS recorded a Gap above 10.1 percent (see Figure 2.2 and Table 2.1). The Policy Gaps and its components remained stable. The average Policy Gap level was 44.5 percent, out of which 9.6 percentage points are due to the application of various reduced and super-reduced rates instead of standard rates (the Rate Gap). The countries with the most flat levels of rates in the EU, according to the Rate Gap, are Denmark (0.8 percent) and Estonia (3 percent). On the other side of spectrum are Cyprus (29.6 percent), Malta (16.5 percent), and Poland (14.6 percent). The Exemption Gap, or the average share of Ideal Revenue lost due to various exemptions, is, on average, 35 percent in the EU, whereas the Actionable Policy Gap – a combination of the Rate Gap and the Actionable Exemption Gap – is, on average, 13 percent of the Notional Ideal Revenue. The econometric analysis repeated after the 2017 Study confirmed the earlier results. We observe that the dispersion of tax rates and unemployment rate have a positive impact on the VAT Gap. Regarding the variables in hands of the administration, on the extended times series compared to the previous year, our results suggest that the nature of the expenditure of the administration, in particular IT expenditure, is more important that the amount of the overall resources.
  • Topic: Economy, Economic growth, Tax Systems, Fiscal Policy
  • Political Geography: Europe, Poland, European Union
  • Author: Grzegorz Poniatowski, Izabela Styczynska, Karolina Beaumont, Karolina Zubel
  • Publication Date: 10-2019
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: EuroPACE is an innovative tool designed to make home renovation simple, affordable and reliable for all Europeans by combining affordable financing with people-centric technical assistance. EuroPACE offers 100% up-front financing that can be repaid over a long term of up to 25 years. The innovation lies in the collection and repayment mechanism – financing is attached to the property and is repaid regularly with charges linked to a property. Homeowners are offered logistical and technical support throughout the process and access to trained and qualified con-tractors. Thus, EuroPACE overcomes the main barriers to home renovation – lack of financing, technical knowledge and complexity of the works. The concept of EuroPACE is inspired by the success of a financing model called Property Assessed Clean Energy (PACE), launched in California in 2008. In the United States (US), the PACE market reached over USD 6 billion in funded projects, including the retrofit of over 220,000 homes, which resulted in more than 50,000 new local jobs and the creation of hundreds new companies.EuroPACE combines the best practices from the US PACE market with project partners’ substantial experience in improving energy efficiency in European buildings. EuroPACE is a three-year project that intends to assess market readiness, deploy a pilot programme in Spain and scale across Europe to four leader cities. A two-phase research (firstly – legal & fiscal readiness, and secondly – market demand) has been carried to assess the overall readiness for adaptation of this model across the European Union (EU). This document is the second phase of the EuroPACE readiness assessment developed to identify European countries most suited for EuroPACE implementation. It complements the legal and fiscal assessment by focusing on the “demand dimension” by analysing local needs for energy efficiency (EE) and renewable energy sources (RES) in residential building renovation of seven selected countries. Based on the results of legal and fiscal analysis of the EU28 MS, in October 2018 the Steering Committee Group of the EuroPACE Horizon2020 (H2020) project chose seven countries: Austria, Belgium, the Netherlands, Italy, Poland, Portugal, and Romania, for the second phase of evaluation. These countries were selected based on the scoring outlined in D2.1 and two additional considerations developed by the Steering Committee Group. First, a diverse geo-graphical distribution of the countries was an important element for the selection of these seven countries. Secondly, the knowledge and expertise of the Steering Committee Group about the national potential market opportunity was taken into consideration during the selection process. While in Austria a similar mechanism has already been tested but was unsuccessful, the country still has been chosen for further analysis. In Belgium, despite being a federal state, there is a strong local and regional interest in new financial mechanisms designed to upscale residential retrofits across the country. In the Netherlands, asset-based financial instruments are currently being discussed at the national level, which opens a window of opportunity for EuroPACE to be tested in the country. As for Italy, although the property-taxation system is far from stable, potential synergies with successful programmes like Ecobonus or Sismabonus should be explored. In Poland, nearly 70% of the 6-million residential buildings need significant energy efficiency overhaul; these buildings contribute to some of the worst air quality across the EU leading to approximately 47 thousand premature deaths annually. Portugal, given its Mediterranean climate, proves a great potential not only for EE, but also prosumer RES development, given that current incentives are far from sufficient. Romania has been chosen mainly because of its highest home-ownership rate across the EU and the most institutionalised property-related taxation, possibly setting a stable base for EuroPACE being collected alongside existing charges.
  • Topic: Climate Change, Energy Policy, Environment, Fiscal Policy, Innovation
  • Political Geography: Europe, Poland, Belgium, Romania, Italy, Netherlands, Portugal, Austria, European Union
  • Author: Izabela Styczynska, Karolina Zubel
  • Publication Date: 08-2019
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: EuroPACE is an innovative financial mechanism inspired by an American building improvement initiative called Property Assessed Clean Energy (PACE). The innovative character of the EuroPACE mechanism is that financing through EuroPACE is linked to the taxes paid on a property. In other words, the financing lent by a private investor is repaid through property taxes and other charges related to the buildings. EuroPACE is therefore in line with the EC’s objectives of (1) putting EE first, (2) contributing to the EU’s global leadership, and (3) empowering consumers to enable MS to reach their energy and climate targets for 2030. Last but not least, EuroPACE could contribute to the democratisation of the energy supply by offering cash-flow positive, decentralised EE solutions. The EuroPACE mechanism engages several stakeholders in the process: local government, investors, equipment installers, and homeowners. To establish the EuroPACE programme, several conditions must be satisfied, each of which are relevant for different stakeholder at different stages of the implementation. For the purpose of this report, we divided these criteria into two categories: key criteria, which make the implementation possible, and complementary criteria, which make the implementation easier. For the time being, it is a pure hypothesis to be tested with potential EuroPACE implementation. One ought to remember that residential on-tax financing is a concept in its infancy in the EU. Therefore, the methodology to evaluate the readiness of a country to implement on-tax financing is complex and consists of six stages:Identification of fiscal and regulatory conditions; Data collection; Weighting; Grading; Country SWOT analysis; Qualitative assessment.
  • Topic: Climate Change, Energy Policy, Economy, Tax Systems, Innovation
  • Political Geography: Europe, Poland, European Union
  • Author: Marek Dabrowski
  • Publication Date: 03-2019
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: Twenty years of euro history confirms the euro’s stability and position as the second global currency. It also enjoys the support of majority of the euro area population and is seen as a good thing for the European Union. The European Central Bank has been successful in keeping inflation at a low level. However, the European debt and financial crisis in the 2010s created a need for deep institutional reform and this task remains unfinished.
  • Topic: Monetary Policy, European Union, Economy, Economic growth, Fiscal Policy, Currency
  • Political Geography: Europe, Poland, European Union
  • Author: Adam Śmietanka, Alejandro Esteller Moré, Grzegorz Poniatowski, José María Durán-Cabré, Mikhail Bonch-Osmolovsky
  • Publication Date: 10-2018
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: In this Report, the Authors present the new Value Added Tax (VAT) Gap estimates for 2016, as well as updated estimates for 2012-2016. In addition to the analysis of the Compliance Gap, this Report examines the Policy Gap in 2016 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. Moreover, the Report contains an econometric analysis of VAT Gap determinants, which is a novelty introduced from this year’s Study. In 2016, most European Union (EU) Member States (MS) saw positive tailwinds with a combined real GDP growth of 2.0 percent. As a result of a growing base and increasing VAT compliance, VAT revenue increased in all MS with three exceptions. Most pronounced is the case of Romania, where VAT revenue decreased in response to reduction of the standard rate by four percentage points. In nominal terms, in 2016, the VAT Gap in EU-28 MS fell below EUR 150 billion and amounted to EUR 147.1 billion. In relative terms, the VAT Gap share of the VAT total tax liability (VTTL) dropped to 12.3 percent from 13.2 percent in 2015, and is the lowest value in the analysed period of 2012-2016. Denoted at the share of GDP, the VAT Gap in 2016 amounted to 0.99% compared to 1.05% in 2015. Of the EU-28, the VAT Gap share decreased in 22 countries and increased in six—namely, Romania, Finland, the UK, Ireland, Estonia, and France. The biggest declines in the VAT Gap—of over five percentage points—occurred in Bulgaria, Latvia, Cyprus, and the Netherlands. The smallest Gaps were observed in Luxembourg (0.85 percent), Sweden (1.08 percent), and Croatia (1.15 percent). The largest Gaps were registered in Romania (35.88 percent), Greece (29.22 percent), and Italy (25.90 percent). Overall, half of EU-28 MS recorded a Gap below 9.9 percent. The Policy Gaps and its components remained stable. The average Policy Gap level was 44.8 percent, out of which 9.95 percentage points are due to the application of various reduced and super-reduced rates (the Rate Gap). Countries with the most flat levels of rates in the EU, according to the Rate Gap, are Denmark (0.93 percent) and Estonia (2.97 percent). The Exemption Gap, or the average share of Ideal Revenue lost due to various exemptions, is, on average, 35 percent in the EU, whereas the Actionable Policy Gap—a combination of the Rate Gap and the Actionable Exemption Gap—is, on average, 16.5 percent of the Notional Ideal Revenue. The econometric analysis can be considered a successful first attempt at inferring the impact of various determinants. Firstly, it can be observed that the productive structure of the economy exerts an impact on the VAT Gap. The share of retailers has the strongest impact on the VAT Gap; however, telecommunications, industry, and art also have a positive impact. Secondly, liquidity constraints and the productive structure of the economy also play a role in determining VAT compliance. The most interesting results have to do with the impact of the variables under the direct control of the tax administration. We show that the impact of the size of the tax administration and the VAT Gap is concave. On the contrary, in the case of IT expenditure, the impact is convex, albeit small, until productivity vanishes when IT expenditure is about 9.8 percent of the total expenditure of the tax administration.
  • Topic: Financial Crimes, Tax Systems, Fiscal Policy, VAT
  • Political Geography: Europe, Poland, European Union
  • Author: Lukasz Janikowski, Marek Dabrowski
  • Publication Date: 09-2018
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: Virtual currencies are a contemporary form of private money. Thanks to their technological properties, their global transaction networks are relatively safe, transparent, and fast. This gives them good prospects for further development. However, they remain unlikely to challenge the dominant position of sovereign currencies and central banks, especially those in major currency areas. As with other innovations, virtual currencies pose a challenge to financial regulators, in particular because of their anonymity and trans-border character.
  • Topic: Science and Technology, Monetary Policy, Economic growth, Currency, Trade
  • Political Geography: Europe, Poland, European Union
  • Author: Marek Dabrowski
  • Publication Date: 04-2018
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically decreasing, the financial sector is more eager to lend, and its clients—to borrow. Rapidly growing asset prices signal the possibility of similar developments in other segments of the economy. In this new macroeconomic environment, central banks should cease unconventional monetary policies and prepare themselves to head off potential inflationary pressures.
  • Topic: Economics, Monetary Policy, Economic growth, Inflation, Macroeconomics, Unemployment
  • Political Geography: Europe, Global Focus, European Union
  • Author: Grzegorz Poniatowski
  • Publication Date: 03-2018
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: The objective of this paper is to derive the characteristics of an effective fiscal governance framework, focusing on the incentives that ensure a commitment to the fiscal rules. We study this problem with the use of econometric tools, complementing this analysis with formal modelling through the lens of a dynamic principal-agent framework. Our study shows that both economic and institutional factors play an important role in incentivising countries’ fiscal efforts. Fiscal balances are affected not only by the economic cycle, but, among others, by the level of public debt and the world economic situation. We find that the existence of numerical fiscal rules, their strong legal entrenchment, surveillance mechanisms, and credible sanctions binding the hands of governments have a significant impact on curbing deficits. The relationship between the Commission and European Union (EU) Member States (MS), where the EU authorities act as a collective principal that designs contracts for MS, has elements in common with the assumptions of the principal-agent framework. These are: asymmetry of information, moral hazard, different objectives, and the ability to reward or punish the principal. We use a dynamic principal-agent model and show that to ensure good fiscal performance, indirect benefits should be envisaged for higher levels of fiscal effort. In order to account for the structural differences of exerting effort by different MS, it is efficient to adjust fiscal effort to the level of indebtedness. To ensure a commitment to the rules, MS with difficulties conducting prudent fiscal policies should be required to exert less effort than the MS with more modest levels of debt. The FIRSTRUN project is a European Union funded multinational research project that investigates the need for fiscal policy coordination in the EU.
  • Topic: Debt, Economics, Regional Cooperation, European Union, Fiscal Policy
  • Political Geography: Europe, European Union
  • Author: Balazs Romhanyi, Lukasz Janikowski
  • Publication Date: 11-2018
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: Unsustainability and procyclicality of fiscal policy are problems that many developed countries face. The public debt crisis revealed that fiscal rules are a useful but insufficient instrument for mitigating them. A large and growing group of economists are calling for the creation of ‘fiscal policy councils’ – independent collegial bodies made up of experts whose role is to act as independent reviewers of government policy and advise the government and parliament on fiscal policy. Such councils currently exist in at least 40 countries. Poland is the only EU country that does not have a fiscal policy council. The aim of this paper is to address the issue of whether a fiscal policy council is needed in Poland and what kind of additional contribution such a council might make to the public debate on fiscal policy.
  • Topic: Debt, Government, Governance, Economy, Fiscal Policy
  • Political Geography: Europe, Poland, European Union
  • Author: Grzegorz Poniatowski, Mikhail Bonch-Osmolovsky, Misha V. Belkindas
  • Publication Date: 10-2017
  • Content Type: Special Report
  • Institution: Center for Social and Economic Research - CASE
  • Abstract: CASE prepared a new study for the European Commission on the VAT Gap in the European Union in 2015. The figures offer an important snapshot of the problems of collecting VAT in the EU and what needs to be done to improve revenues and fight tax fraud. During 2015, the overall VAT that should have been collected in EU Member States grew by about 4.2 %, while collected VAT revenues rose by 5.8 %. As a result, the overall VAT Gap in the EU Member States decreased by about €8.7 billion in absolute terms, down to €151.5 billion. As a percentage, the overall VAT Gap decreased by 2.1 % to 12.7 %. In 2015, the highest VAT Gap was recorded in Romania with a figure of 37.18 %. In absolute terms, the highest VAT Gap of €35 billion was in Italy. Overall, the VAT Gap decreased in most Member States, with the largest improvements noted in Malta, Romania and Spain. The VAT Gap measured in this study includes for the first time revenues emerging from new VAT rules for cross-border sales of e-services which came into force on 1 January 2015, following a Commission proposal. CASE's team was led by Grzegorz Poniatowski, Director of Fiscal Policy Studies, and composed of Mikhail Bonch-Osmolovskiy and Misha Belkindas.
  • Topic: European Union, Tax Systems, Fiscal Policy, VAT
  • Political Geography: Europe, Poland, European Union