A study on the economic effects of the current VAT rates structure : final report.
Date: 2016-10-07
Institutions: Directorate-General for Taxation and Customs Union
Subjects: EU Member State, VAT, VAT rate, economic consequence, fiscal policy

A  study  on  the  economic  effects  of  the 
current VAT rates structure 

Final Report 

TAXUD/2012/DE/323 

FWC No. TAXUD/2010/CC/104 

Client: European Commission, TAXUD 

Institute for Advanced Studies (Project Leader) 
CPB Netherlands Bureau for Economic Policy Analysis (Consortium Leader) 

In consortium with: 

CAPP                   CASE 

CEPII                   ETLA 

IFO                       IFS 

Vienna, 17 October 2013 

This  report  was  commissioned  by  the  European  Commission  (DG  TAXUD)  and 
prepared by a consortium under the leader CPB. The views and opinions expressed in 
this report are not necessarily shared by the European Commission, nor does the report 
anticipate decisions taken by the European Commission. 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2 

CPB Netherlands Bureau for Economic Policy Analysis 

Van Stolkweg 14 

P.O. Box 80510 

2508 GM The Hague, the Netherlands 

Telephone 

+31 70 338 33 80 

Telefax 

Internet 

+31 70 338 33 50 

www.cpb.nl 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
Contributors to this report 

CONSORTIUM MEMBERS 

IHS Institute for Advanced Studies (Project Leader) 
Sandra Müllbacher, Raphaela Hyee  

CPB Netherlands Bureau for Economic Policy Analysis (Consortium Leader) 
Leon Bettendorf, Hugo Rojas-Romagosa, Paul Veenendaal 

CAPP Centre for the Analysis of Public Policies  
Massimo Baldini 

CASE Center for Social and Economic Research 
Luca Barbone, Mikhail Bonch-Osmolovskiy 

IFS Institute for Fiscal Studies 
Stuart Adam 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
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Contents  

Preface ....................................................................................................... 13 

Abstract ..................................................................................................... 15 

Executive Summary ................................................................................. 16 

1 

2 

1.1 
1.2 

Introduction ...................................................................................... 23 
The VAT in the European Union ............................................... 23 
The case for a diversification of VAT rates –  
insights from economic theory ................................................... 28 
Tasks performed, reform scenarios and report outline ............... 34 

1.3 

Static analysis of VAT structure and reforms ............................... 38 
2.1  Data and procedure .................................................................... 38 
2.2  Results: Overview ...................................................................... 57 
2.3  Results: VAT paid by private households .................................. 66 
2.4  Results: VAT paid by non-household entities............................ 87 
2.5  Results: Effects of different scenarios on VAT liability ............ 95 

3  General equilibrium effects of VAT reforms ................................. 99 
3.1  Methodology: The WorldScan model ........................................ 99 
3.2 
Implementation of status quo and reform scenarios ................. 107 
3.3  Results ...................................................................................... 110 

4  Conclusions ..................................................................................... 133 

A.  Annex............................................................................................... 138 
A.1  Growth rates applied to HBS data ............................................ 138 
A.2  COICOP Classification ............................................................ 140 
A.3  Validation exercise:  

Comparison with results based on micro data .......................... 145 

A.4  VAT reductions on expenditure categories  

potentially in conflict with other EU policies .......................... 161 
A.5  WIOD Classifications of products and sectors ........................ 163 
A.6  GTAP and WorldScan Classifications and Aggregations ........ 165 

References ............................................................................................... 168 

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List of Tables 

Table 1: Total VAT revenue – in absolute terms and relative to GDP (as of 2011) ....... 26 
Table 2: VAT rates in Member States (as of 2011) ........................................................ 27 
Table 3: Sample Size Household Budget Surveys 2005 ................................................. 40 
Table 4: Comparison of average effective VAT rates in 2011 in HBS and WIOD ........ 56 
Table 5: 2011 Baseline VAT Liability (million Euros) .................................................. 59 
Table 6: 2011 Baseline VAT Liability (million Euros), continued from Table 5 ........... 60 
Table 7: Baseline VAT Liability for main exempt sectors and activities ....................... 61 
Table 8: Baseline VAT Liability for main exempt sectors and activities   

(continued from Table 7) ................................................................................... 62 

Table 9: Baseline VAT Liability for main exempt sectors and activities   

(continued from Table 8) ................................................................................... 63 
Table 10: Standard and revenue neutral rates ................................................................. 65 
Table 11: Average VAT rates of private households of EU Member States in 2011 ..... 68 
Table 12: Average VAT bills of private households of EU Member States as a 

proportion of total household expenditure and in € per year ............................. 70 
Table 13: Categories with the highest VAT expenditure, their share and their combined 
share of total VAT expenditure for EU Member States, 2011........................... 72 

Table 14: Average VAT bill of private households as a proportion of total household 

expenditure and in Euros per year, by income quintile in 2011 and reform 
scenarios 1 and 2, for BE, BG, CZ, DK, DE and EE ......................................... 77 

Table 15: Average VAT bill of private households as a proportion of total household 

expenditure and in Euros per year, by income quintile in 2011 and reform 
scenarios 1 and 2, for EL, ES, FR, IE, IT and CY ............................................. 78 

Table 16: Average VAT bill of private households as a proportion of total household 

expenditure and in Euros per year, by income quintile in 2011 and reform 
scenarios 1 and 2, for LV, LT, LU, HU, MT and NL ........................................ 79 

Table 17: Average VAT bill of private households as a proportion of total household 

expenditure and in Euros per year, by income quintile in 2011 and reform 
scenarios 1 and 2, for AT, PL, PT, RO, SI and SK............................................ 80 

Table 18: Average VAT bill of private households as a proportion of expenditure   
and in Euros per year, by income quintile in 2011 and reform scenarios 1   
and 2, for FI, SE and UK ................................................................................... 81 

Table 19: Most affected socio-economic groups in 2011, measured by the proportion   

of VAT expenditure to total household expenditure .......................................... 84 
Table 20: Most affected socio-economic groups by reform scenarios 1 and 2 in Member 
States, measured by the relative rise in VAT expenditure ................................. 85 
Table 21: Most affected socio-economic groups by reform scenarios 1 and 2 in Member 
States, measured by equivalised absolute increase in VAT expenditure ........... 86 
Table 22: Scenario 1 – Abolition of zero and reduced rates ........................................... 88 

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Table 23: Scenario 1 – Effects on main exempt sectors and activities ........................... 91 
Table 24: Scenario 1 – Effects on main exempt sectors and activities   

(continued from Table 20) ................................................................................. 92 

Table 25: Scenario 2 – Revenue-neutral abolition of reduced and zero rates   

(new liability and percentage change from baseline) ........................................ 94 

Table 26: Revenue effects and compensation, scenarios 1 and 3,  

expressed in % of GDP ...................................................................................... 97 
Table 27: Revenue effects and compensation, scenarios 1 and 3 (Million Euros) ......... 98 
Table 28: Scenario A, changes in VAT rates and sectoral output,  

simple EU-27 averages .................................................................................... 111 

Table 29: Scenario A – percentage changes in main economic indicators, relative 

changes with respect to baseline values in 2020 .............................................. 114 

Table 30: Scenario A – percentage changes in sectoral output share, relative changes 

with respect to the baseline values in 2020 ...................................................... 115 

Table 31: Comparison of standard VAT rates (as of 2011), revenue neutral standard 

rates as obtained in scenario 2 and revenue neutral standard rates as obtained   
in scenario B .................................................................................................... 117 

Table 32: Sectoral output share for each scenario for the EU-27 as a whole, percentage 

changes with respect to the baseline ................................................................ 119 

Table 33: Scenario B – percentage changes in main economic indicators, relative 

changes in 2020 with respect to baseline values .............................................. 121 

Table 34: Scenario B – percentage changes in sectoral output share, relative changes 

with respect to the baseline values in 2020 ...................................................... 122 

Table 35: Scenario C – percentage changes in main economic indicators, relative 

changes in 2020 with respect to baseline values .............................................. 125 

Table 36: Scenario C – percentage changes in sectoral output share, relative changes 

with respect to the baseline values in 2020 ...................................................... 126 

Table 37: Scenario D – percentage changes in main economic indicators, relative 

changes in 2020 with respect to baseline values .............................................. 129 

Table 38: Scenario D – percentage changes in sectoral output share, relative changes 

with respect to the baseline values in 2020 ...................................................... 130 
Table 39: Summary of macroeconomic consequences for each scenario for the EU-27 as 
a whole, percentage changes with respect to the baseline ............................... 132 
Table 40: Growth rates applied to HBS data (uprate from 2005 to 2011) .................... 138 
Table 41: Comparison of estimates of VAT bills, in absolute values and as a percentage 
of total expenditure, by COICOP category, estimated on aggregate HBS data as 
in this report, and micro-HBS data, for Austria ............................................... 146 
Table 42: Comparison of estimates of VAT bills, in absolute values and as a percentage 

of total expenditure, by income quintile and COICOP category, estimated on 
aggregate HBS data as in this report, and micro-HBS data, for Austria .......... 148 

Table 43: Original and imputed incomes per equivalent income decile in the EU-SILC 

2006 and HBS 2005. ........................................................................................ 151 

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Table 44: Comparison of estimates of VAT bills, in absolute values and as a percentage 
of total expenditure, by COICOP category, estimated on aggregate HBS data as 
in this report, and micro data, for Italy ............................................................ 153 
Table 45: Comparison of estimates of VAT bills, in absolute values and as a percentage 
of total expenditure, by income quintile, estimated on aggregate HBS data as in 
this report, and micro data, for the UK ............................................................ 155 
Table 46: Comparison of estimates of VAT bills as a percentage of total expenditure, by 

income quintile, as in IFS et al. (2011), estimated on aggregate data and micro 
data, taking into account different concepts of equivalisation and income 
definition .......................................................................................................... 159 
Table 47: Abolition of zero and reduced rates for the categories Water, Energy products, 
Street cleaning, refuse collection and waste treatment, Housing ..................... 162 
Table 48: WIOD Classification of sectors .................................................................... 163 
Table 49: WIOD Classification of products ................................................................. 165 
Table 50: GTAP sectors and WorldScan intermediate and final sectoral aggregations 166 

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List of Figures 

Figure 1: Standard and revenue neutral rates ................................................................. 66 
Figure 2: Scenario 1 – Changes in VAT liabilities of non-households .......................... 89 
Figure 3: Scenario 2 – Revenue neutral abolition of reduced and zero rates ................. 95 
Figure 4: Increase in VAT liability (percent of GDP) ................................................... 99 

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List of Acronyms and abbreviations 

AGO 

AT 

BE 

BG 

CES 

CGE 

Agriculture 

Austria 

Belgium 

Bulgaria 

Constant Elasticity of Substitution 

Computational General Equilibrium 

COICOP 

Classification of Individual Consumption by Purpose 

CPA 

Classification of Products Activity 

CY 

CZ 

DE 

DK 

EE 

EL 

ES 

EU 

Cyprus 

Czech Republic 

Germany 

Denmark 

Estonia 

Greece 

Spain 

European Union 

EU-27 

Current Member States of the European Union minus Croatia 

EUROSTAT  Statistical Office of the European Union 

FI 

FR 

GDP 

GFCF 

GTAP 

HBS 

HU 

IBFD 

IE 

Finland 

France 

Gross Domestic Product 

Gross Fixed Capital Formation 

Global Trade Analysis Project 

Household Budget Survey 

Hungary 

International Bureau of Fiscal Documentation 

Ireland 

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IT 

LCFS 

LES 

LT 

LTM 

LU 

LV 

MT 

NA 

NACE 

NL 

NPISH 

OCS 

OECD 

OSG 

OSR 

PL 

PT 

RO 

Italy 

Living Costs and Food Survey 

Linear Expenditure System 

Lithuania 

Low-tech Manufacturing 

Luxembourg 

Latvia 

Malta 

National Accounts 
Statistical Classification of Economic Activities in the European 
Community 
Netherlands 

Non-Profit Institutions Serving Households 

Commercial Services 

Organisation for Economic Cooperation and Development 

Public Services 

Other Services 

Poland 

Portugal 

Romania 

ROW 

Rest of the World 

SE 

SI 

SILC 

SK 

TAXUD 

TRA 

UK 

UN 

Sweden 

Slovenia 

Statistics on Income and Living Conditions 

Slovakia 
Taxation and Customs Union Directorate-General  
(European Commission) 
Transport 

United Kingdom 

United Nations 

Study on VAT rates structure 

12 

USA 

VAT 

VATTL 

WIOD 

WS 

United States of America 

Value Added Tax 

VAT Total Tax Liability 

World Input Output Database 

WorldScan 

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13 

Preface 

This final report presents the results of the project “A study on the economic effects of 
the  current  VAT  rates  structure”,  Specific  Contract  no.  TAXUD/2012/DE/323, 
implementing Framework Service Contract no. TAXUD/2010/CC/104 for the provision 
of economic analysis in the area of taxation. 

The  main research  question  of  the  project is to  quantify  for each Member  State  (EU-
27): 
  how  much,  broken  down  by  categories  of  goods  and  services,  private  households 

and non-taxable and taxable persons carrying out exempt activities spend on VAT  

  how much they would spend in case 

  zero and reduced rates1 were abolished  
  zero and reduced rates were abolished and replaced with a new revenue neutral 

standard rate. 

  zero and reduced rates were abolished and low-income households receive lump 

sum transfers in compensation for their higher VAT bills. 

We also calculate VAT revenues  for each Member State (EU-27) and the EU-27 as a 
whole for each of these scenarios. 

Changes  in  the  prices  of  goods  and  services  lead  to  changes  in  total  expenditure  and 
expenditure  patterns.  For  some  countries these  changes  in the consumption  of private 
households have been analysed in a previous project of the consortium (see IFS et al., 
2011). The present study, however, ignores behavioural reactions while performing the 
analysis on the reform scenarios regarding effects on households, non-households and 
VAT revenues. The underlying assumption is that net expenditures (both of households 
and non-households) remain constant notwithstanding changes in absolute and relative 
prices of goods and services.  

The second part of the study includes a simulation of the general equilibrium effects on 
main  macroeconomic  indicators  (GDP,  consumption,  employment,  foreign  trade) 
following  changes  in  the  VAT  regime.  This  analysis  takes  into  consideration 

1 We use “zero and reduced rates” as a short-hand description of the full set of reduced rates, super-reduced 
rates, parking rates and zero rates of VAT applied in different EU countries. 

Study on VAT rates structure 

 
 
 
 
                                                      
14 

behavioural  reactions  to  external  shocks  such  as  changes  in  tax  regimes.  Given  the 
different  concepts  of  analysis  (static  and  general  equilibrium  analysis)  the  scenarios 
analysed in the latter are similar, though not equal, to the ones specified above. 

The report presents the situation in 2011, as the latest available data for most countries 
are from 2011.  

The report presents the results obtained given the available data. Especially the analysis 
for  private  households  has  several  shortcomings,  as  a  request  for  additional  data  to 
Eurostat was not answered favourably2. Therefore, the following information requested 
in the Terms of Reference could not be delivered: 
  VAT paid as a proportion of household income (both disaggregated data on mean 
income  in relation  to  the  various  household  groups and  data  on  mean  income  per 
income and expenditure quintiles are not available) 

  Results  broken  down  by  expenditure  quintiles  (both  data  on  mean  consumption 
expenditure  and  on  the  structure  of  consumption  expenditure  by  expenditure 
quintile are not available) 

For  some  countries  information  on  certain  tables  is  missing.3  Also,  more  detailed 
information on the definition of breakdowns could not be obtained. 

The final version of the report will extend this version by adding the following: 
  Abstract in French 
  Executive Summary in French 

We gratefully acknowledge the comments on a first draft of this report received from 
Tuomas Kosonen, Andreas Peichl and European Commission staff. 

2 Unlike other European statistics (such as the EU-SILC or the Labour Force Survey) HBS micro data are 
not yet available for research purposes, although there are intentions to change this in near future when 
aspects of anonymisation and confidentiality are settled.  

3 Italy: missing data for households broken down by income quintiles (we provide results based on micro 

data instead). 

Netherlands: missing data for households broken down by the number of active persons in the household 

and for different household types. 

Romania: missing data for households broken down by the activity status of the household head. 
Sweden: missing data for households broken down by the number of active persons in the household. 
Slovenia: data provided by household type is too fragmentary to enable calculations. 
Slovakia: missing data for households broken down by the number of active persons in the household. 
In addition, some subgroups are missing in some countries (e.g. the self-employed in Sweden). 

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Abstract 

This study provides a comprehensive overview of the distributional effects of the VAT 
rates structures currently in place in the EU-27 Member States. It builds on a consistent 
database and uses a coherent methodology that facilitates the meaningful comparison of 
effective VAT rates across categories of goods and services and across countries. This 
is  crucial  as  the  degree  to  which  governments  rely  on  zero  and  reduced  rates  varies 
greatly across countries, generating an uneven picture of effective VAT rates in the EU. 
This report sets out to analyse, for each country, the distributional effects of the current, 
diversified VAT rates structure, and to estimate how the abolition of zero and reduced 
rates would affect VAT payments by households and non-households, both overall and 
for socio-economic sub-groups (low-income households, single-parent households, etc.) 
and  sector  (health,  education,  etc.).  It  estimates  the  magnitude  of  additional  VAT 
revenues  that  could  be  generated  by  abolishing  zero  and  reduced  rates,  and 
quantitatively assesses the likely macroeconomic consequences (in each Member State 
and across the EU) of the implementation of a uniform VAT rates structure within each 
Member State. 

Study on VAT rates structure 

 
 
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Executive Summary 

Objective 

VAT  rates  structures  in  the  European  Union  are  widely  diversified.  The  objective  of 
this study is twofold: first, we collect data on the VAT rates structure currently in place 
in  the  EU-27  Member  States,  on  expenditures  and  the  corresponding  VAT  payments. 
Second,  we  estimate  the  potential  effects  of  abolishing  all  zero  and  reduced  rates4 
currently in place on households, non-households, VAT revenues and various important 
macroeconomic indicators, for all EU-27 countries. The data are collected and prepared 
for each Member State, taking into account the country’s rules regarding exemptions, 
zero, super-reduced, reduced and parking rates.  

Data and procedure 

We use several databases to perform the analyses. For the analysis of households, we 
use  aggregate  information  from  national  Household  Budget  Surveys  provided  by 
Eurostat.  We  uprate the  latest  available  data  from  2005  to  2011  using  information  on 
expenditure growth from National Accounts data. We then apply the VAT rates in place 
in  2011  in  each  Member  State  to  the  various  categories  of  goods  and  services.  We 
calculate  how  much  an  average  household  pays  in  VAT  in  absolute  terms  and  as  a 
proportion  of  their  total  expenditure,  and  further  break  down  the  results  by 
socioeconomic  characteristics  (income,  household  type).  We  analyse  three  reform 
scenarios:  1.,  abolish  all  zero  and  reduced  VAT  rates  (and  tax  the  formerly  zero  or 
reduced rated goods and services at the standard rate), 2., abolish all zero and reduced 
rates,  but  lower  the  standard  rate  such  that  the  reform  is  revenue  neutral  and  3.,  as 
scenario  1,  but  compensate  households  in  the  first  and  second  (3a)  or  first  income 
quintile  (3b)  for  their  higher  VAT  payments.  We  analyse  how  each  reform  scenario 
would change the average VAT burden in each Member State.  

(WIOD) 

The  analysis  of  non-households  and  VAT  revenues  uses  data  from  the  World  Input 
from 
Output  Database 
communications  from  national  authorities.  Again  we  apply  VAT  rates  to  the 
classification of goods and services and calculate VAT liabilities for all Member States 
and  different  kinds  of  non-households  (exempt  sectors,  government,  non-profit 
institutions serving households and irrecoverable input VAT paid on gross fixed capital 

information  gathered 

supplemental 

and 

4 We use “zero and reduced rates” as a short-hand description of the full set of reduced rates, super-reduced 
rates, parking rates and zero rates of VAT applied in different EU Member States. 

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formation).  We  calculate  the  changes  in  VAT  liabilities  for  non-households  for 
scenarios 1 and 2. Furthermore, we calculate increases in VAT revenues that would be 
expected  following  the  implementation  of  scenario  1,  and  consider  an  additional 
scenario that compensates households in the first and second (scenario 3a) or in the first 
income quintile (scenario 3b) for their higher VAT payments.5 

These  analyses  are  performed  assuming  that  behaviour  does  not  change  as  a 
consequence of the reforms (households and non-households continue to purchase the 
same  amount  of  goods  and  services).  In  addition,  we  perform  a  general  equilibrium 
analysis  incorporating  behavioural  responses  using  the  general  equilibrium  model 
WorldScan.  The  impact  of  different  reform  scenarios  on  GDP,  employment, 
consumption and trade volumes are analysed for the EU as a whole and separately for 
each Member State (EU-27).  

Results 

Households 

Households account for 60 % of all VAT liability across the EU-27 countries. We find 
that the average EU-27 household faces a VAT bill that amounts to 11 % of their total 
expenditure.  This  ratio  is  highest  in  Romania  and  Hungary  (17.8 %  and  17.5 %), 
followed by Latvia (15.3 %), Lithuania (14.7 %) and Slovakia (13.7 %). Households in 
Luxembourg (6.2 %), Cyprus (6.8 %), Spain (7.2 %), the Netherlands (7.7 %) and the 
United  Kingdom  (8.0 %)  face  the  lowest  VAT  bill  as  a  proportion  of  expenditure.  In 
most  countries,  the  largest  part  of  private  households’  VAT  bill  relates  to  goods  and 
services belonging to the category “Transport”: Expenditure on the purchase and use of 
vehicles is high and usually taxed at the standard rate. In those countries where food is 
taxed at the standard rate, VAT paid on food and non-alcoholic beverages is substantial. 
Expenditure  on  housing  and  energy  is  usually  taxed  far  below  the  standard  rate. 
However,  as  expenditure  on  housing  is  an  important  part  of  total  expenditure,  VAT 
payments relating to these categories are high in many countries.  

Abolishing zero and reduced rates (scenario 1) increases the average VAT rate faced by 
households, but the size of the change varies considerably between Member States. The 
effect is almost non-existent in Bulgaria, Denmark, Slovakia and Estonia, where zero or 

5 As we lack the necessary information we cannot perform an analysis of scenario 3 for different household 
types. For example, we do not know how many single households are in the first income quintile and are 
therefore not affected by VAT increases in scenario 3 – this could only be done with micro data.  

Study on VAT rates structure 

 
 
 
                                                      
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reduced rates apply only to very few supplies. Households in Poland, on the other hand, 
face an increase in the average VAT rate of more than 6 percentage points. We also find 
large  increases  in  Portugal,  Malta,  Ireland,  Italy,  France,  Spain,  the  UK,  Austria, 
Luxembourg,  Belgium,  Greece,  the  Czech  Republic,  Slovenia  and  the  Netherlands. 
Scenario  2  (introducing  a  uniform,  but  lower  VAT  rate)  increases  overall  VAT 
payments for private households in most countries, because they benefit more from zero 
and reduced rates in the status quo than non-households.  

To analyse the distributional effects of the current and alternative VAT rates structures, 
we  separate  households  into  five  equally  sized  income  groups  or  quintiles.  In  all 
countries,  high-income  households  pay  more  VAT  than  low-income  households  in 
absolute  terms.  We  find  the  largest  gap  in  Luxembourg  –  where  the  highest  income 
quintile pays seven times more VAT than the lowest income quintile – and the smallest 
gap  in  the  Czech  Republic,  Austria  and  the  Netherlands.  Looking  at  VAT  bills  as  a 
proportion  of  total  expenditure,  we  find  Hungary  to  be  the  only  country  with  a 
regressive system (low-income households face a higher VAT burden as a fraction of 
total  expenditure  than  high-income  households).  The  VAT  system  in  11  countries 
(Spain,  Romania,  Bulgaria,  Lithuania,  Slovakia,  Estonia,  Greece,  Austria,  the  Czech 
Republic, Cyprus and Latvia) is approximately proportional: that is, all income quintiles 
pay roughly the same share of their expenditure in VAT. We find a progressive system 
in the United Kingdom, Luxembourg, Italy, Belgium, Poland, Malta, Slovenia, Finland, 
Ireland, Denmark, Sweden, Portugal, France, the Netherlands and Germany.   

Abolishing zero and reduced rates does not have the same effect on households across 
the income distribution. In nine countries (Romania, Lithuania, the Netherlands, Latvia, 
France,  Austria,  Hungary,  Finland  and  Sweden)  the  increase  in  VAT  as  a  fraction  of 
expenditure is similar across all income groups (with the average change ranging from 
0.5 percentage points in Latvia to 3.5 percentage points in France). In the remaining 14 
countries,6  poorer  households  face  a  larger  increase  as  a  fraction  of  expenditure  than 
richer households. Thus, in these countries, the zero and reduced VAT rates currently in 
place seem to do quite well at reducing the VAT burden of poorer households. High-
income  households,  however,  face  larger  increases  in  absolute  VAT  payments  in  all 
countries  as  a  consequence  of  the  reform.  That  is,  in  all  countries,  high-income 
households  benefit  more  from  zero  and  reduced  rates  in  absolute  terms,  while  low-
income households benefit more as a percentage of expenditure.  

6 Recall that there are almost no reform effects in 4 countries (Bulgaria, Denmark, Estonia and Slovakia). 

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Abolishing zero and reduced rates, but lowering the standard rate to make the reform 
budget  neutral,  leads  to  higher  losses  for  lower  income  than  for  higher  income 
households in most countries. Higher-income households allocate a larger share of their 
expenditure to supplies currently taxed at the standard rate. Therefore, in this scenario, 
they  benefit  more  from  the  reduction  in  the  standard  rate.  On  the  other  hand,  lower-
income households suffer more from the abolition of zero and reduced rates and benefit 
less from the reduction in the standard rate.7 

Non-households 

Across all EU-27 countries, on average, exempt sectors account for 19 % of total VAT 
liabilities.  Other  non-households  such  as  governments  and  non-profit  institutions 
serving households account for 21 %. These numbers differ between countries. We find 
the largest share of VAT liabilities of non-households in Luxembourg (65 %), followed 
by  the  Netherlands  (56 %)  and  Sweden  (48 %),  and  the  lowest  in  Lithuania  (26 %), 
Greece (29 %) and Malta (30 %). Non-households are affected by the reform scenarios 
through non-recoverable VAT they pay on inputs.  

In  most  countries,  following  the  abolition  of  zero  and  reduced  rates,  non-households 
face  a  lower  increase  in  their  VAT  bills  than  households.  The  increase  in  VAT 
payments  faced  by  exempt  sectors  is  14 %  for  the  EU-27  on  average,  while  VAT 
liability  for  other  non-households  increases  by  13 %.  Seven  of  the  36  sectors  are 
affected  by  the  reform  in  all  countries  (average  increase in  VAT  liabilities  across  the 
EU-27 given in brackets):  
  Real Estate Activities (20 %) 
  Education (20 %) 
  Health and Social Work (19 %) 
  Other Community, Social and Personal Services (18 %).  
  Public Administration and Defence (11 %) 
  Financial Intermediation (7 %) 
  Post and Telecommunications (5 %) 

Abolishing  zero  and  reduced  rates  and  lowering  the  standard  rate  accordingly,  by 
construction, does not change overall VAT liability. However, in most countries non-

7 Although we focus on the analysis of VAT expenditure patterns across the income distribution, this study 
also shows breakdowns by other household characteristics (activity status of the household head, number 
of active persons in the household, household type and age of the household head). 

Study on VAT rates structure 

 
 
 
 
                                                      
20 

households  benefit  from  such  a  reform  because  the  reduction  in  the  standard  rate  is 
more  than  sufficient  to  compensate  for  the  abolition  of  zero  and  reduced  rates  on 
supplies  purchased  by  exempt  sectors  and  other  non-households.  On  average,  VAT 
liability for exempt sectors decreases by 4 %. For other non-households, VAT liability 
decreases by 5 %.8 

Additional VAT revenues 

We  calculate  additional  VAT  revenues  for  the  reform  scenario  in  which  zero  and 
reduced  rates  are  abolished.  In  addition,  we  consider  a  scenario  where  low-income 
households  are  reimbursed  for  their  additional  VAT  burden  via  a  lump-sum  transfer 
allowing  them  to  buy  the  same  basket  of  supplies  as  they  did  in  the  base  scenario 
(scenario 3). We consider two different definitions of “low-income” households. First, 
we  compensate  households  in  the  first  and  second  income  quintile  (3a);  second,  we 
compensate households in the first income quintile only (3b). 

Abolishing zero and reduced rates in all Member States (EU-27), on the EU-27 average, 
leads  to  an  increase  in  VAT  revenues  of  1.6 %  of  GDP.  The  increase  is  largest  for 
countries  making  extensive  use  of  zero  and/or  reduced  rates,  such  as  Poland  and 
Portugal (these  countries  experience  an  increase in VAT  revenues  of  3.3 %  of  GDP), 
followed by Italy (+3.0 %), Spain (+2.9 %) and Malta (+2.8 %). On the other hand, the 
effect  is  virtually  zero  in  Denmark,  Bulgaria  and  Slovakia.  On  the  EU-27  average, 
compensating low-income households decreases the additional VAT revenues to 1.3 % 
of GDP (compensating first and second quintile, scenario 3a) or 1.5 % (compensating 
first  quintile  only,  scenario  3b).  This  is  because  higher  income  households  are 
responsible for the lion’s share of spending, even on zero and reduced rated supplies, in 
absolute terms. 

General equilibrium effects of VAT reforms 

We  estimate  the  medium-term  effects  of  various  VAT  reform  scenarios  using  a 
Computational  General  Equilibrium  (CGE)  model,  WorldScan.  This  analysis  of  the 
broader  economic  consequences  of  VAT  reforms  is  conceptually  different  from  the 
static  analysis  of  households,  non-households  and  VAT  revenues;  therefore,  the 

8  In  Estonia,  Cyprus,  Latvia,  Lithuania,  Romania  and  Slovakia  exempt  sectors  face  an  increase  in  their 

VAT burden. This is the case for other non-households in Spain, France and Italy. 

TAXUD/2012/DE/323 

 
 
 
 
 
 
                                                      
21 

scenarios analysed in this dynamic part do not directly correspond to the three scenarios 
analysed above. 

In  scenario  A,  we  abolish  zero  and  reduced  VAT  rates,  and  the  additional  VAT 
revenues  are  channelled  back  into  the  economy  by  increases  in  transfers  and  public 
spending.  In  this  scenario, effective VAT  rates increase, reducing  production in those 
sectors  facing  the  highest  increases  in  VAT  (agriculture,  low-tech  manufacturing  and 
transport)  in  the  medium-run.  For  the  EU-27  as  a  whole,  we  find  relatively  small 
changes in the main macroeconomic indicators. EU-27 GDP decreases by 0.4 %. These 
reductions  are  in  line  with  reductions  in  consumption  (-0.7 %),  employment  (-0.5 %, 
with a larger reduction for low-skilled than for high-skilled workers) and international 
trade (export and import volumes decrease by 0.7 % and 0.5 %, respectively). Targeting 
the additional VAT revenue specifically to economically weak households (low-skilled 
employed and unemployed households, scenario E) does not substantially change these 
results.  

When we decrease the standard VAT rate such that the abolition of zero and reduced 
rates is revenue neutral (scenario B), we find no effect on GDP on the EU-27 average. 
The effects on the other macroeconomic variables are also small; however, we do find 
some employment growth, this time benefitting low-skilled households relatively more 
than  high-skilled  households.  In  addition,  wages  of  low-skilled  workers  increase 
compared  to  those  of  high-skilled  workers.  In  this  scenario,  the  effects  vary  between 
Member  States.  GDP  increases  in  14  Member  States  (Latvia  experiences  the  biggest 
increase – 1.02%, Portugal and Cyprus are tied for the second largest increase – 0.36%) 
and  decreases  in  11  Member  States  (Hungary  faces  the  largest  decrease  -0.18 %, 
followed by France and Lithuania with -0.17 % and -0.16 % respectively). There is no 
change in two Member States (Estonia and Malta).  

Scenarios A, B and E disregard the potential reduction of the administrative burden of 
VAT  collection  that  could  arise  from  a  simpler  VAT  rates  structure.  Taking  these 
effects  into  account  (scenario  C)  leads  to  very  small  positive  effects  on  all  main 
macroeconomic variables (GDP +0.11 %, consumption +0.08 % employment +0.04 %, 
export  volumes  +0.14 %  and  import  volumes  +0.05 %)  in  the  EU-27  on  average. 
Finally, using the additional VAT revenues to finance cuts in the capital-investment tax 
(scenario D) leads to increases of GDP in the EU-27 average (+0.6 %). 

Study on VAT rates structure 

 
 
 
22 

Conclusions 

Given  the  heterogeneous  VAT  rates  system  in  the  EU-27,  the  reform  scenarios  have 
very different effects in the different Member States. This makes drawing general and 
committed  conclusions  on  the  results  of  this  study  somewhat  difficult.  We  can, 
however, conclude that: 

  Zero  and reduced rates overall achieve  their  goal of lowering  the  VAT burden of 
low-income  households  when  we  look  at  VAT  payments  as  a  proportion  of 
expenditures.  

  However,  in  Member  States  with  an  extensive  use  of  zero  and  reduced  rates, 
substantial additional VAT revenues could be raised by abolishing these VAT rate 
reductions;  and  most  of  these  additional  VAT  revenues  would  be  paid  by  high-
income households. This demonstrates that the potential of zero and reduced VAT 
rates as a tool for redistribution is limited. More targeted policy instruments could 
accomplish  the  task  of  compensating  low-income  households  for  their  additional 
VAT payments at comparably low costs. 

  The introduction of a budget-neutral uniform VAT rate, replacing all zero, reduced 
and standard rates, benefits non-household entities while households suffer a loss in 
most  countries.  In  particular,  we  find  that  low-income  households  suffer  more  in 
proportion  to  their  expenditures.  When  transfers  are  paid  to  compensate  these 
households,  revenue-neutrality  of  the  reform  requires  a  higher  uniform  VAT-rate 
(Crawford et al., 2010). 

  Concerning the medium-run macroeconomic consequences of reforms of the VAT 
rates structure, we find that harmonising diverging VAT rates within each Member 
State  does  not  necessarily  have  significant  effects,  as  both  VAT  exemptions  and 
large  rate  differences  between  Member  States  continue  to  exist.  However,  if  we 
allow  for  possible  efficiency  gains  generated  by  simpler  VAT  rates  systems,  we 
find larger positive effects on Member States’ economies.  

TAXUD/2012/DE/323 

 
 
    
 
23 

1 

Introduction 

1.1  The VAT in the European Union 

On 17 May 1977, the Sixth VAT Directive was  adopted which led to a uniform VAT 
coverage in the European Union. The VAT Directive9, enacted on 1 January 2007 and 
replacing  the  Sixth  Directive,  contains  legislations  concerning  the  common  VAT 
system  currently  in  place.10  The  Directive  does  not  stipulate  one  uniform  percentage 
rate  for  the  whole  Union,  but  sets  boundaries  for  the  Member  States.  It  restricts  the 
minimum  standard  rate  to  15 %  (this  regulation  has  been  extended  to  31  December 
2015) and allows for two reduced rates of at least 5 % for goods and services listed in 
the  Annex  III  of  the  VAT  Directive.  Moreover,  after  consultation  of  the  VAT 
Committee, each Member State may apply a reduced rate to the supply of natural gas, 
electricity or district heating. Some derogations and exceptions for Member States are 
in place, entailing the existence of zero rates, super reduced, reduced and parking rates. 
These derogations were granted during the negotiations of the VAT rates provisions or 
in the Acts of Accession to the European Union. Most of them are part of the so called 
"stand-still"  situation  and apply  until  the  adoption  of  definitive  arrangements  of  VAT 
relating to the trade between Member States. The main objective of these derogations is 
to ensure the gradual transition towards the application of uniform rules. Overall, such 
derogations prevent a coherent system of VAT rates in the EU from being applied.  

The  VAT  is  a  major  source  of  tax  revenue  in  the  EU,  yielding  € 904  billion  in  2011 
alone.  This  amounts  to  generating  7.2 %  of  the  EU’s  GDP  or  17.8 %  of  all  public 
revenues. The average standard rate in the EU was 20.7 % in 2011, compared to 19.4 % 
in 2008, mirroring the need for financial consolidation in many Member States in the 
wake of the financial crisis. In 2011, the lowest standard rates could be found in Cyprus 
and Luxembourg, which both exhausted the minimum 15 %. The highest standard rates 
were applied in Denmark, Hungary and Sweden with 25 %. It is also Denmark where 
the VAT made up the biggest share of GDP, 9.9 %, whereas Spain had the lowest share 
with 5.4 %.11 Table 1 illustrates the differences in VAT revenue and its share of GDP 
across EU Member States.  

9 Council Directive 2006/112/EC of 28 November 2006. 
10 see http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:347:0001:0118:en:PDF 

[2013/03/25] 

11 Source: Eurostat, http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database, Economy 
and  finance,  Government  statistics,  Annual  government  finance  statistics,  Main  national  accounts  tax 
aggregates [2013/06/29] 

Study on VAT rates structure 

 
                                                      
24 

Not only is the VAT a vital source of tax revenue but being a consumption tax, it also 
has  some  valuable  economic  advantages  over  other  taxes.  Not  taxing  intermediate 
supplies12  avoids  distortions  in  the  production  process.  Furthermore,  taxing  only 
consumption avoids disincentives on savings and investments (IFS et al., 2011). 

As mentioned above, Member States are entitled to introduce up to two reduced VAT 
rates of at least 5 %. In addition to these reduced rates, some Member States also have 
super-reduced rates, parking rates (see below) and zero rates.13 The main reasons for the 
existence  of  reduced  rates  are  equity  concerns  (this  applies  especially  to  every  day 
goods  that  lower-income  households  spend  a  higher  fraction  of  their  income  on,  e.g. 
foodstuffs) and accounting for positive externalities and internalities (IFS et al., 2011).14 
Even  if  a  good  or  service  is  not  listed  in  Annex  III  of  the  VAT  Directive,  Member 
States can tax it at a reduced rate, if it was subject to a reduced rate before 1 January 
1991 and the reduced rate is at least 12 % (a “parking rate”). Furthermore, regardless of 
whether or not a good or service is listed in Annex III of the Directive, if it was subject 
to  a  zero  rate  or  a  rate  lower  than  5 %  before  1  January  1991,  Member  States  may 
continue  using  this  rate,  provided  that  the  reductions  are  “in  accordance  with 
Community law and […] have been adopted for clearly defined social reasons and for 
the benefit of the final consumer” (the zero and the so called super-reduced rates).  

Table  2  gives  a  general  overview  of  the  different  VAT  rates  in  place  in  all  Member 
States. The table reflects the VAT rates applicable in 2011 which have been used for 
the analysis carried out in this study. An updated situation of the VAT rates applied in 
the Member States can be found on the Commission's website.15 

In addition to the already large number of exceptions, one can find further special rates 
scattered across some of the EU-27 Member States for very specific supplies, such as 

12 VAT is applied at each stage of production; however, businesses have a right to deduct the tax on their 

inputs. 

13  In  addition,  several  supplies  are  completely  exempt  from  VAT.  In  article  132,  the VAT  directive  lists 
supplies that shall be exempt from VAT; Annex X, part b lists supplies Member States can continue to 
exempt. A zero rate is different from an exemption of VAT in so far as a zero rate indeed guarantees a tax 
free product. The producer can deduct VAT on inputs for the production of zero rated supplies, which is 
not the case for supplies that are exempted from VAT. In that case, although the final consumption good 
is tax free, the producers have no right to deduct the VAT they had to pay on their input goods. 
14 The following section 1.2 will summarise the discussion on reduced rates in economic theory. 
15http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_e

n.pdf [2013/06/29] 

TAXUD/2012/DE/323 

 
 
 
 
 
                                                      
for tolls on bridges in the Lisbon area, or for the supply of liquid petroleum gas (LPG) 
in  cylinders  in  Cyprus.  Generally  speaking,  the  VAT  systems  in  place  across  the 
European Union are still quite heterogeneous, despite the common legal framework and 
guidelines in place. 

25 

Study on VAT rates structure 

26 

Table 1: Total VAT revenue – in absolute terms and relative to GDP (as of 2011) 

Country 

VAT Revenue 
(in millions of €) 

% of GDP 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
EU 27 

26,021 
3,352 
10,994 
23,870 
189,920 
1,363 
15,027 
57,376 
140,506 
9,782 
98,557 
1,517 
1,368 
2,444 
2,667 
8,517 
520 
41,610 
23,447 
29,843 
14,235 
11,412 
3,049 
4,711 
16,915 
36,642 
128,299 
903,961 

7.0 
8.7 
7.0 
9.9 
7.3 
8.5 
7.2 
5.4 
7.0 
6.2 
6.2 
8.4 
6.8 
7.9 
6.3 
8.5 
7.9 
6.9 
7.8 
8.0 
8.3 
8.7 
8.4 
6.8 
8.9 
9.5 
7.3 
7.2 

Source: Eurostat16  
Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny, 7.451 Danish kroner, 0.706 Latvian 
lats,  3.453  Lithuanian  litai,  279.370  Hungarian  forints,  4.121  Polish  zloty,  4.239  Romanian  lei,  9.030 
Swedish kronor and 0.868 British pounds to 1 Euro. 

16  http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database,  Economy  and  finance, 
Government  statistics,  Annual  government  finance  statistics,  Main  national  accounts  tax  aggregates 
[2013/06/29] 

TAXUD/2012/DE/323 

 
                                                      
Table 2: VAT rates in Member States (as of 2011) 

Country 

Standard 
Rate 

Reduced 
Rate(s) 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Note: All countries have VAT exemptions in place for some supplies. 
Source: European Commission (2011a).  

6|12 
9 
10 
- 
7 
9 
6.5|13 
8 
5.5 
9|13.5 
10 
5|8 
12 
5|9 
6|12 
5|18 
5|7 
6 
10 
5|8 
6|13 
5|9 
8.5 
10 
9|13 
6|12 
5 

21 
20 
20 
25 
19 
20 
23 
18 
19.6 
21 
20 
15 
22 
21 
15 
25 
18 
19 
20 
23 
23 
24 
20 
20 
23 
25 
20 

Super 
Reduced 
Rate 
- 
- 
- 
- 
- 
- 
- 
4 
2.1 
4.8 
4 
- 
- 
- 
3 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 

27 

Parking 
Rate 

Zero Rate 

12 
- 
- 
- 
- 
- 
- 
- 
- 
13.5 
- 
- 
- 
- 
12 
- 
- 
- 
12 
- 
13 
- 
- 
- 
- 
- 
- 

Yes 
No 
No 
Yes 
No 
No 
No 
No 
No 
Yes 
Yes 
No 
No 
No 
No 
No 
Yes 
No 
No 
No 
No 
No 
No 
No 
Yes 
Yes 
Yes 

Study on VAT rates structure 

 
28 

1.2  The case for a diversification of VAT rates – insights from economic theory 

In this section, we discuss differentiated VAT rates from the perspective of economic 
theory, relying on general economic reasoning and recent literature on the subject. The 
aim  of  this  section  is  to  review  which  arguments  have  been  put  forward  in  favour  of 
taxing some goods and services at zero or reduced rates, and assess the theoretical merit 
of reduced VAT rates as compared to other policy instruments. Any conclusions in this 
section are based on the cited literature and not on the original results of this study (for 
conclusions based on our own results, see chapter 4). 

The  theory  of  optimal  taxation  takes  as  a  benchmark  the  case  in  which  consumption 
taxes are uniform on all final consumption goods, and zero on all intermediate goods. 
Not  taxing  (intermediate)  production  inputs17  prevents  distortions  in  the  allocation  of 
factor inputs, while taxing final consumption at a uniform rate avoids the distortion of 
consumption choices (e.g. Mankiw et al., 2009). In addition to distorting consumption 
choices, VAT exemptions distort competition (as exempt sectors, most prominently the 
financial  sector,  face  different  input  prices  across  EU  countries)18,  and  create  a  bias 
towards self-supply and towards imports19 (Crawford et al., 2010).   

Reasons put forward for nevertheless taxing some goods and services at reduced rates 
can be grouped into three categories (IFS et al., 2011, Copenhagen Economics, 2007):  

 

 

(alleviate 

the  potentially 

equity  concerns 
consumption taxes)  
efficiency (counteract adverse effects of other features of the tax system 
on  the  incentive  to  purchase  goods  and  services  on  the  market,  or 
produce them at home) 

regressive  nature  of 

  positive  production/consumption  externalities,  and  what  IFS  et  al. 
(2011)  and  Copenhagen  Economics  (2007)  call  “internalities”,  that  is, 
positive  effects  of  the  consumption  of  a  good  or  service  on  the 

17 VAT is applied at each stage of production; however, businesses have a right to deduct the tax on their 

inputs. 

18 Financial service providers face different input taxes in different countries of the European Union, which 

distorts competition if financial services are especially transferable across countries. 

19 To understand why VAT exemptions can create a bias towards imports, consider a sector that is exempt 
in  country  A.  As  a  domestic  exempt  firm  cannot  deduct  VAT  on  its  inputs,  unrecovered  VAT  is 
cascading into the cost price of this supplier. In contrast, a firm producing in country  B (not an exempt 
firm, just a firm producing supplies that are exempt in country A) and exporting to country A can deduct 
VAT on inputs. As the price of the supplies of the foreign firm does not include VAT on its inputs, this 
creates a bias towards imports (Crawford et al., 2010, p. 305) 

TAXUD/2012/DE/323 

 
 
 
                                                      
consumers  themselves,  that  are  not  fully  taken  into  account  when 
making consumption decisions.  

29 

1. Equity concerns 

The first point – equity concerns – relates to the frequently asserted regressive nature of 
consumption taxes. Poorer households tend to spend a larger share of their income on 
consumption than wealthier households, who tend to have a  higher savings rate. As a 
consequence, VAT payments disproportionally burden households at the bottom of the 
income distribution (European Commission, 2012). Taxing goods and services that are 
considered to cover basic needs, such as food, water or social housing, at a reduced rate 
aims  to  ease  this  burden.  The  reasoning  is  that,  as  wealthier  households  have  more 
income  left  to  spend  on  non-essential  goods  after  fulfilling  their  basic  needs,  taxing 
non-essential goods at higher rates means that a larger share of the total tax revenue is 
being  borne  by  higher  income  households.  The  reduced  rates  therefore  work  to 
redistribute  purchasing  power  from  richer  to  poorer  households  (IFS  et  al.,  2011), 
softening  the  burden  on  the  latter  (note  that  introducing  reduced  rates  on  necessities 
make the VAT system more progressive, regardless of the ex-ante distributional impact 
of  a  VAT  system).  This  notion  is  supported  empirically:  it  has  been  shown  that  the 
regressive effect of consumption taxes varies considerably between countries, and that 
countries  with  similar  levels  of  standard  VAT  rates  can  exhibit  very  different  overall 
distributional effects of the VAT system (European Commission, 2012, O’Donoghue et 
al., 2004). For instance, Belgium and France  have nearly the same standard VAT rate 
(21 %  and  19.6 %,  respectively),  but  the  incorporation  of  consumption  taxes  into  an 
assessment  of  disposable  income  inequality  leaves  the  Gini  Coefficient20  of  Belgium 
nearly unchanged (it increases by less than 0.25 percentage points), while France’s Gini 
Coefficient  increases  by  more  than  3.3  percentage  points  (O’Donoghue  et  al.,  2004). 
The authors attribute this primarily to the share of goods and services that are exempt 
from  VAT  or  taxed  at  a  lower  rate,  and  to  the  differences  in  savings  rates  across  the 
income distribution (European Commission, 2012).  

The VAT system is regressive when the analysis is based on VAT payments expressed 
in  terms  of  (disposable)  income.  However,  this  conclusion  no  longer  holds  when  the 
relationship  between  VAT  payments  and  total  expenditures  is  considered  (IFS  et  al., 

20 The Gini Coefficient is a measure of income inequality that takes the value of 0 if income is distributed 
equally,  and  1  if  one  household  (or  person)  has  all  income  in  the  economy.  That  is,  a  lower  Gini 
Coefficient corresponds to a more equal income distribution.  

Study on VAT rates structure 

 
 
 
                                                      
30 

2011).  When  looking  at  VAT  payments  as  a  percentage  of  total  expenditure  (as 
opposed  to  disposable  income),  Figari  and  Paulus  (2012)  conclude  that  for  the  five 
European countries they consider (Belgium, Greece, Ireland, Hungary and the UK), the 
VAT  system  does  not  seem  to  be  regressive.  Indeed,  households  in  the  richest 
disposable income decile pay a higher fraction of their total expenditure on VAT than 
households in the lowest income decile (because they spend a higher proportion of their 
expenditure on goods and services that are taxed at higher rates).   

Richer households also pay more VAT in absolute terms (Crawford et al., 2010), and, 
since  expenditures  rise  with  income,  also  benefit  more  from  VAT  exemptions  and 
reduced rates in absolute terms (IFS et al., 2011).  

Furthermore, there exist other policy tools, such as means-tested transfers and income 
tax exemptions, which might be better suited to reach distributional objectives, because 
they can be more effectively targeted at low income households. Revenues generated by 
the abolition of reduced rates could be used to increase income related benefits to low 
income households (Crawford et al., 2010).  

From  a  theoretical  point  of  view,  the  main  argument  against  using  differentiated 
consumption  taxes  as  a  tool  for  redistribution  is  that  if  personal  preferences  for 
consumption do not directly depend on income (or the underlying ability determining 
income)21,  any  information  conveyed  by  individual  consumption  choices  is  also 
available  in  individual  incomes.  But  redistributing  income  through  the  income  tax  is 
less  costly  in  efficiency  terms,  because  it  does  not  distort  individual  consumption 
(Mankiw et al., 2009). That is, if the policy objective is to tax individuals based on their 
income,  it  is  preferable  to  directly  tax  income,  unless  consumption  choices  reveal 
something about income that cannot be captured by personal income tax (e.g. there is 
significant  tax  evasion  and  underreporting  that  hinders  the  efficient  collection  of 
income tax, and consumption tax is less prone to evasion).22 

21 It is important to distinguish preferences from demand, because demand will typically be influenced by a 

household’s budget constraint, and therefore household income.  

22 Consider a country in which all high income individuals have a well-known proclivity for caviar, while 
all  low-income  individuals  despise  it,  and  personal  income  tax  collection  is  problematic  because  of 
prevalent  misrepresentation  of  income  and  fraud.  In this  country,  consumption of  caviar  would  convey 
information  about  income  that  income  does  not,  because  income  is  not  correctly  reported,  and  caviar 
consumption is a tell-tale sign of high income. If, on the other hand, income is observable, income can be 
taxed directly without distorting the caviar price; therefore, taxing caviar is not necessary.  

TAXUD/2012/DE/323 

 
 
 
 
 
                                                      
31 

2. Efficiency 

A  second  reason  for  taxing  some  goods  and  services  at  a  lower  rate  is  to  mitigate 
distortions  that  arise  elsewhere  in  the  tax  system.  This  applies  to  labour  intensive 
services that can be substituted by (tax-free) household production, such as household 
cleaning,  minor  repairs  (Do-It-Yourself)  or  food  preparation.23  Income  tax  and  VAT 
generate  a  disparity  between  the  market  price  of  work  and  take-home  pay;  therefore, 
workers  value  hours  worked  less  than  the  market  does.  Individuals  might  choose  to 
perform tasks themselves (which is tax free) rather than to buy the same service on the 
market and work additional hours in their normal job (both of which are taxed), if the 
price  of  the  service  including  taxes  exceeds  the  take-home  pay  they  would  receive  if 
they  worked  the  time  necessary  to  perform  the  task  themselves.  If  the  same  services 
would have been purchased on the market in the absence of earnings  and commodity 
taxation,  the  result  is  a  welfare  loss.  Therefore,  there  is  an  economic  case  for  taxing 
services that can be substituted by home production at a lower rate, because subsidising 
their consumption in fact counteracts inefficiencies caused by the tax system. But this 
argument  in  favour  of  differentiated  VAT  rates  only  applies  to  services  that  can 
reasonably  be  substituted  by  home-production  (e.g.  childcare  services).  Other  labour 
intensive,  though  professionalised  services  (such  as  hairdressing),  that  are  in  fact 
eligible for a reduced VAT rate under EU law24, are less suitable to be substituted by 
(untaxed) home production. Therefore, the case for taxing such services favourably is 
weak (IFS et al., 2011, Copenhagen Economics 2007). 

Also, as IFS et al. (2011) observe, some goods and services that are presently eligible 
for a reduced VAT rate under EU law do not correspond well with the labour intensive 
services  prone  to  substitution  by  home  production.  For  example,  basic  food  supplies 
that  are  taxed  at  a  reduced  rate  in  many  countries  should  be  seen  as  a  substitute  for 
work because they require preparation (and hence time input), whereas expenditure on 
restaurants,  which  are  currently  taxed  at  the  standard  rate  in  15  Member  States, 
generally  rises  with  hours  worked.  Nonetheless,  12  Member  States  currently  apply  a 
reduced rate to restaurants. 

23 Specifically, EU VAT law  allows  for reduced rates on minor repairs of bicycles, shoes, leather goods, 
clothing and household linen, renovation and repairs of private dwellings (excluding materials), domestic 
cleaning  and  cleaning  of  windows  in  private  households,  as  well  as  restaurant  services,  in  all  Member 
States (IFS et al., 2011, pp. 539).  

24 IFS et al., 2011, p. 540. 

Study on VAT rates structure 

 
 
 
                                                      
32 

Another reason to tax labour intensive sectors at a lower rate is to promote employment 
in  general  by  promoting  products  and  services  provided  by  low-skilled  workers.  This 
argument is not limited to sectors that are at risk to be substituted by home production, 
but  products  and  services  produced  or  provided  primarily  by  lower  skilled  workers. 
This  argument  relies  on  the  assertion  that  structural  unemployment  by  low  skilled 
workers  is  at  least  partly  due  to  restrictive  labour  market  regulations,  high  minimum 
wages  and  non-wage  labour  costs  that  have  disproportionally  affected  low  skilled 
workers. Taxing sectors that primarily employ low skilled workers at favourable rates is 
therefore an adequate way to boost demand, drive up wages and increase employment 
in  those  sectors;  while  employment  in  other  sectors  characterised  by  a  higher  skilled 
workforce is not harmed to the same extent, because labour markets for higher skilled 
workers  are  more  flexible,  and  therefore  better  able  to  adjust  to  changes  in  demand 
(Copenhagen  Economics,  2007).25  This  argument  only  applies  if  the  joint  design  of 
labour market regulations, minimum wages and unemployment benefits is such that it 
creates  structural  unemployment  to  a  markedly  higher  degree for low  skilled than  for 
higher  skilled  workers.  If  this  is  not  the  case,  any  reductions  in  low  skilled 
unemployment  will  be  matched  by  an  increase  in  structural  unemployment  of  highly 
skilled workers (due to a distortion of demand away from the goods and services that 
are primarily produced by them). In addition, favourable VAT treatment is unlikely to 
reduce  structural  unemployment  if  the  targeted  products  or  services  are  tradable,  and 
the boost in demand will partly boost imports. Furthermore, differences in employment 
shares of low-skilled workers between sectors are actually rather modest (Copenhagen 
Economics,  2007),  which  implies  that  allowing  VAT  reductions  to  improve  the 
employment prospects of low skilled workers is a poorly targeted policy measure. 

3. Production/consumption externalities 

A third reason why some products are taxed at reduced rates is that their consumption is 
deemed  desirable in a  way  that  is  assumed  not to  be fully  internalised  by  consumers. 
For  example,  some  goods  may  have  positive  production  and/or  consumption 
externalities  to  the  wider  society  that  are  not  fully  taken  into  account  by  individual 
consumers, such as public transport or other environmentally friendly  products. Other 
supplies may be more beneficial to the consumers than they themselves realise, such as 

25 See also Report (COM(2003) 309) from the Commission on the experimental application of a 
reduced rate of VAT to certain labour-intensive services. 
http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/labour_intensive_services/ind
ex_en.htm, [2013/06/30] 

TAXUD/2012/DE/323 

 
 
 
                                                      
33 

sports activities, books and other cultural or educational events, and should therefore be 
promoted  through  favourable  VAT  treatment.  Also  here,  the  question  is  whether  a 
subsidy through the VAT rates system is the best policy to boost consumption of these 
goods and services. The first issue is that, because VAT is calculated as a fraction of the 
product price, reduced VAT rates provide a larger subsidy to more expensive products 
than to cheaper ones. Therefore, for reduced VAT rates to be a well-designed subsidy, 
the social benefit of a product needs to rise with its price. In many cases this would be 
hard to argue – why would it be desirable to subsidise first class train tickets more than 
second  class  train  tickets,  as  the  former  reduce  the  trains  capacity  by  more  than  the 
latter, driving up ticket prices? Why would one want to subsidise the hard cover version 
of  a  book  by  more  than  the  soft  cover  version?  Also,  reduced  VAT  rates  on  such 
products  can  only  incentivise  consumers,  not  businesses,  because  VAT  paid  on 
immediate  inputs  can  be  deducted  by  most  businesses.  Therefore,  subsidising 
environmentally  friendly  technology  and  the  like  through  reduced  VAT  rates  only 
encourages their  use  by  private consumers,  not  businesses.  Likewise,  in  this  case,  the 
problem  of  the  VAT  as  a  subsidy  is  that  it  cannot  be  specifically  targeted  at  certain 
groups  of  consumers.  For  example,  if  under-consumption  of  books  and  other 
educational  activities  is  seen  as  a  problem  for  certain  groups  of  people  –  e.g.  young 
people or those on moderate incomes – significant subsidies may be enjoyed by those 
who  already  read  aplenty.  So,  even  if  aggregate  demand  for  books  is  higher  because 
they are less burdened by VAT, it is not certain that the original problem is alleviated. 
More  targeted  policies  apart from  reduced VAT  rates  –  such  as direct  price  subsidies 
for cultural or educational events for young people, or people on moderate incomes – 
are thinkable to reach the goal of boosting consumption of goods and services that are 
deemed desirable.  

4. Conclusion 

To sum up, whether zero and reduced VAT rates are the best means to achieve the goals 
they  have  been  introduced  for  is  questionable,  although  an  economic  case  for  a 
differentiated VAT rates structure does exist for some very specific goods and services 
(Copenhagen Economics, 2007). This already somewhat ambiguous case in support of 
zero  and  reduced  rates  is  accompanied  by  adverse  effects  of  the  heterogeneous  VAT 
rates structure in the EU: differentiated VAT rates distort consumption choices and can 
therefore decrease efficiency. Furthermore, the complexity of the current VAT system 
generates important compliance costs for businesses and may harm the functioning of 
the  internal  market  by  discouraging  intra-EU  trade  (European  Commission,  2011b). 
The  European  Commission’s  communication  on  the  future  of  VAT  (European 

Study on VAT rates structure 

 
 
34 

Commission,  2011b)  therefore  suggests  a  fundamental  overhaul  of  the  EU  VAT 
structure towards a simpler, more unified design.  

This  study  sets  out  to  assess  the  likely  effects  of  a  change  in  the  differentiated  VAT 
structures  that  presently  exist  in  the  EU-27  Member  States.  It  aims  to  inform  policy 
makers  about  the  likely  risks  and  benefits  of  changes  to  this  important  source  of 
revenue. 

1.3  Tasks performed, reform scenarios and report outline 

We  analyse  the  current  VAT  rates  structure  in  27  Member  States  of  the  European 
Union and calculate the distributional, revenue and macroeconomic effects of reforms 
of this structure. For this purpose we perform four tasks.  

The first three tasks are purely static. We calculate the effects of three reform scenarios 
on VAT payments of households and non-household entities assuming no behavioural 
reactions.  
  Scenario  1:  zero  and  reduced  rates  are  abolished,  and  all  goods  and  services  that 
were  taxed  at  these  rates  are  now  taxed  at  the  standard  rate  applicable  in  each 
Member State.  

  Scenario 2: the abolition of zero and reduced rates is compensated by lowering the 
standard VAT rate to a level that makes the reform budget neutral for each Member 
State. 

  Scenario  3:  zero  and  reduced  rates  are  abolished,  but  households  in  the  first  and 
second  (3a)  or  first  (3b)  income  quintile  (bottom  40 %  or  20 %  of  the  income 
distribution, respectively) are compensated for their (average) loss with lump sum 
transfers.  

Task 1 
For scenarios 1 and 2, we analyse how much, broken down by category of goods and 
services (12 expenditure categories following the COICOP26 classification), households 
pay on average in VAT in absolute terms and in relation to household expenditure. 

We disaggregate these results by the following household characteristics:  
  activity status of the household head  

26 Classification Of Individual COnsumption by Purpose; a description of categories  can be  found in the 

Annex (section A.2). 

TAXUD/2012/DE/323 

 
 
 
 
 
                                                      
35 

  number of household members who are active in the labour force  
 
  household type (single person household, single person household with dependent 

income quintile 

children etc.)  

  age of the household head. 

Task 2 
Broken down by categories of goods and services, we analyse how much the different 
types of non-taxable persons and taxable persons other than households, who carry out 
exempt activities, spend on VAT payments in the status quo and how much they would 
spend if zero and reduced rates were abolished. 

Task 3 
We provide an estimate of the additional revenues that would be generated if all zero 
and reduced rates were abolished and if low income households were compensated for 
their additional VAT payments, separately for 27  Member States and for the EU as a 
whole. 

Task 4 
We analyse the effects of an abolishment of zero and reduced rates on macroeconomic 
indicators  using  a  computational  general  equilibrium  (CGE)  model  of  the  European 
economy, WorldScan. WorldScan, as CGE models in general, is a complex model that 
incorporates all major parts of an economy (firms, households, and government), their 
interaction  and  their  behavioural  adjustments  to  external  shocks.  The  results  of 
WorldScan are medium-term and show the difference of the new equilibrium values of 
important  macroeconomic  indicators  (GDP,  consumption,  employment,  foreign  trade) 
following an external shock (such as a change in effective VAT rates due to a change in 
the VAT rates structure) compared to the status quo.  

Due to the conceptual differences to the analyses performed in tasks 1 to 3, the reform 
scenarios analysed in task 4 are similar but not identical to those examined in the first 
part.  

Study on VAT rates structure 

 
 
 
 
36 

  Scenario A: Zero and reduced rates are raised to the level of the standard rate. The 
additional government revenues are channelled back into the economy according to 
the share of public spending (consumption and transfers).27 

  Scenario B: Zero and reduced rates are abolished and the standard rate is replaced 
by a new rate that is calculated to be revenue neutral after behavioural response.28 
  Scenario C: We would expect that the abolition of zero and reduced rates eases the 
administrative  burden  associated  with  VAT  collection.  The  practicalities  of  tax 
collection (and any compliance or administrative costs to governments or firms) are 
not  modelled  in  WorldScan.  Hence,  scenarios  A  and  B  do  not  take  into  account 
possible  gains  from  a  decreased  administrative  burden  that  could  result  from  a 
simpler,  uniform  VAT  rates  structure.  In  scenario  C,  we  therefore  explore  the 
economic effects of simplifying VAT compliance and administration. 

  Scenario D: In this scenario, the VAT increase of scenario A is compensated by a 
decrease in the capital-investment tax such that the reform is overall budget neutral.  
  Scenario E: This scenario simulates the same VAT increase as scenario A, but the 
additional  tax  revenues  associated  with  the  VAT  increase  are  transferred  to  low-
skilled unemployed and employed households. 

This  report  is  structured  according  to  these  four  tasks.  Tasks  1  to  3  are  tackled  in 
chapter  2.  In  section  2.1  we  describe  the  data  and  procedures  used  in  the  analysis. 
Section  2.2  gives  a  short  introduction  to  the  results  for  the  EU-27  Member  States. 
Section 2.3 presents the analysis for private households, section 2.4 for non-household 
entities with non-refundable VAT liabilities on their intermediate consumption, section 
2.5  presents  the  additional  VAT  revenues  expected  from  reform  scenarios  1  and  3. 
Chapter 3 presents the methodology and discusses the results of the general equilibrium 
analysis performed to answer the questions of task 4. Chapter 4 concludes.  

This  report  includes  several  annexes.  Section  A.1  contains  the  growth  rates  used  to 
uprate  the  data  for  the  household  analysis  to  the  reference  year  (2011).  Section  A.2 
shows the COICOP classification, used for the break-down of household consumption 
expenditures. Section A.3 compares our results based on aggregate data to results of an 
analysis  using  micro  data  as  a  validation  exercise.  Section  A.4  deals  with  goods  and 
services  that  are  eligible  for  zero  and  reduced  VAT  rates,  while  potentially  being  in 

27  In  WorldScan  as  in  other  CGE  models  the  government  cannot  save  or  borrow  money  –  all  additional 
revenues are spent. As  some of this additional spending is transferred to low-income households by  an 
increase in transfers, scenario A is more comparable to scenario 3 than to scenario 1. 

28  This  new  standard  rate  takes  into  account  behavioural  responses  and  therefore  differs  from  the  one 

calculated in scenario 2. 

TAXUD/2012/DE/323 

 
 
 
                                                      
37 

conflict with other EU policies trying to reduce or change their consumption.29 Section 
A.5 showsA.4 the WIOD classification of products and sectors used for the analysis on 
non-households  and  additional  VAT  revenues.  And  section  A.6  shows  the  GTAP 
classification used in World Scan (the model used to perform task 4). 

In addition to this report we deliver an Addendum, containing  more detailed analyses 
on  the  results  of  tasks  1  and  2  for  each  Member  State.  Furthermore,  we  provide 
spreadsheets with detailed tables for the results of tasks 1 and 4. A reading instruction 
to the spreadsheets on the results of task 1 can be found at the end of the Addendum.  

29 See European Comission (2011b), section 5.2.2. 

Study on VAT rates structure 

 
 
                                                      
38 

2  Static analysis of VAT structure and reforms 

2.1  Data and procedure 

Analysis for households 

Data 

As  we  were  not  granted  access  to  micro  data  for  every  EU  Member  State,  we  use 
summary data of the national Household Budget Surveys (HBS) provided publicly by 
Eurostat30 to conduct distributional analyses on the current VAT rates structure and the 
reform scenarios.31  

Eurostat  publishes  National  Accounts  (NA)  data  on  an  annual  basis  and  figures  are 
available up to 2011 for most countries. In contrast, Household Budget Survey (HBS) 
data  are  published  in  longer  intervals,  with  the  data from  2005  being  the  most recent 
data accessible at the time of writing. We could have performed the analysis using data 
from 2005 applying 2005 VAT rates, essentially analysing what would have been the 
effect if zero and reduced rates had been abolished in 2005. However, in the eight years 
since  2005,  VAT  rates  have  changed  considerably;  therefore,  this  type  of  analysis 
would not give a satisfying answer to the research question. We decided to uprate the 
HBS data from 2005 to the last available year of NA data (2011) and apply the VAT 
rates  of  that  year.  Rather  than  using  one  single  average  growth  rate  per  country,  we 
calculated separate rates for the main groups of expenditures. In this way, not only we 
can  account  for  the  nominal  increase  in  expenditure,  but  also  for  changes  in  the 
structure of household consumption. In order to control for population growth, we used 
per capita figures rather than absolute numbers. Rates for all countries were calculated 
in Euros32 and can be found in the annex (section A.1). 

Generally  speaking,  Household  Budget  Surveys  are  sample  surveys  of  private 
households  which  provide  information  on  household  consumption  expenditures  on 

30  http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database,  Population  and  social 
condition, Living conditions and welfare, Consumption expenditure of private households [2013/03/18] 
31 We perform a validation exercise and repeat our simulations using micro data for a subgroup of countries 
for which we have access to disaggregated consumption surveys: Austria, Italy and the UK. The results of 
this exercise can be found in the Annex (section A.3). 

32  All  results  are  presented  in  Euros.  The  applied  exchange  rates  –  calculated  from  NA  in  2011  –  are 

specified for each table. 

TAXUD/2012/DE/323 

 
 
 
 
                                                      
39 

goods  and  services.  Eurostat  provides  aggregated  data  on  household  expenditures  for 
categories  of  goods  and  services  at  the  two-digit  level  (12  categories)  or  at  the  more 
detailed  three-digit  (47  categories)  and  four-digit  (113  categories)  levels.  Detailed 
information on the COICOP classification can be found in the annex (section A.2). In 
addition, consumption expenditure is broken down according to some demographic and 
socio-economic  characteristics  such  as  number  of  economically  active  persons  in  the 
household, household type or income quintiles (see below).  

Eurostat  receives  these  data  from  Member  States’  National  Statistical  Offices  which 
carry  out  the  Budget  Surveys  in  their  respective  country.  Unlike  other  European 
statistical domains, however, the provision of HBS data is voluntary; consequently, the 
extent  to  which  figures  are  available  varies  considerably  (European  Commission, 
2005). As a result, some statistics are missing for some countries in the Eurostat data 
set.33  

When  assessing  the  quality/accuracy  of  the  data  we  must  be  aware  that  the  Eurostat 
statistics, generated from HBS data, may be prone to errors, which are inherent to any 
sample  survey.  Perhaps  most  importantly,  sampling  and  non-sampling  errors  must  be 
considered.  Sampling  errors  arise  from  assuming  that  it  is  possible  to  adequately 
estimate  the  characteristics  of  a  population  by  looking  at  a  subset  of  that  population. 
Non-sampling  error  is  an  umbrella  term  for  many  types  of  errors,  e.g.  coverage  and 
measurement errors.  

When it comes to sampling errors, it should be mentioned, that in comparison to other 
EU household surveys, e.g. the Labour Force Survey (LFS) or the Statistics on Income 
and  Living  Conditions  (SILC),  the  HBS  samples  are  rather  small  for  some  countries 
(European Commission, 2005). For about half of all countries, the sample size is lower 
than 5,000; one of the lowest numbers being 1,570 households in the Netherlands. On 
the  other  hand,  sample  sizes  larger  than  20,000  were  achieved  for  Germany,  Italy, 
Poland and Romania (Table 3). Obviously, the level of sampling errors directly depends 
on the achieved sample size: the higher the sample size, the better the accuracy. All in 

33  We  specified  these  in  the  Preface:  For  all  countries,  we  cannot  calculate  VAT  paid  in  proportion  to 
household income and we cannot break down our results by expenditure quintiles. In addition, for some 
countries, specific tables are missing: Italy (income quintiles), Netherlands (number of active persons in 
the  household,  household  types),  Romania  (activity  status  of  the  household  head),  Sweden  (number  of 
active persons in the household), Slovenia (household types), Slovakia (number of active persons in the 
household). 

Study on VAT rates structure 

 
 
 
                                                      
40 

all,  however,  Eurostat  concludes  that  from  a  policy  making  perspective  the  attained 
sample sizes are still more than satisfactory (European Commission, 2005). 

Table 3: Sample Size Household Budget Surveys 2005 

Country 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

Sample Size 
(households) 
3,550 
2,870 
2,965 
2,449 
52,217 
3,432 
6,555 
8,881 
12,240 
6,884 
24,107 
2,990 
2,774 
7,586 
3,202 
9,058 
2,586 
1,570 
8,400 
34,767 
16,700 
33,066 
3,725 
4,710 
4,007 
2,079 
6,785 

Source: European Commission (2005) 

When  it  comes  to  non-sampling  errors,  potential  coverage  errors  are  an  issue. 
Generally, coverage errors occur if the probability of being included in the HBS is not 
equal for all households, which can lead to over- or under-coverage, causing bias in the 
estimated  figures,  e.g.  if  certain  types  of  households  with  very  specific  consumption 

TAXUD/2012/DE/323 

 
 
41 

patterns are not sampled. One should be aware that HBSs generally only sample private 
households, disregarding collective households such as elderly homes, military barracks 
or jails. Moreover, some countries exclude specific categories of households or certain 
remote geographical areas which are difficult to access. For example, Germany, did not 
sample  households  with  a  monthly  net  income  exceeding  € 18,000,  and  the  United 
Kingdom  excluded  some  Scottish  off-shore  Islands  and  the  Isles  of  Scilly  (European 
Commission, 2005). 

Non-response  is  another  source  of  bias  in  sample  estimates,  particularly  if  the  non-
respondents have specific characteristics (i.e. they differ from sampled households in a 
non-random  way).  This  is  an  important  point,  considering  that  for  the  Household 
Budget Survey 2005, the mean response rate for the EU as a whole was around 60 %, 
with important variations between countries – ranging from 6 % in Belgium to 89 % in 
Cyprus and 90 % in Romania. Measurement and processing errors resulting from recall 
problems,  underreporting  of  expenditures  on  certain  “undesirable”  products  (such  as 
gambling, alcoholic drinks, tobacco or drugs) and interviewer influence represent other 
potential  sources  of  non-accuracy.  Also,  for  about  half  of  all  countries,  the  year  in 
which interviews for the HBSs took place did not match the reference year of 2005, and 
price coefficients were used to adjust for this difference. Finally, the HBS data for four 
countries  –  the  Czech  Republic,  Hungary,  Malta  and  Romania  –  do  not  contain 
information  on  imputed  rents,  leading  to  an  underestimation  of  expenditures  for 
housing  and  presumably  an  overestimation  of  the  VAT  burden  in  proportion  to 
expenditures (see below). 

In conclusion, while a lot of progress has been made and much harmonization has been 
achieved  over  the  past  years,  methodology  of  data  collection  and  quality  of  data  can 
still vary substantially between  Member States. For more detailed information on this 
issue,  the  reader  is  referred  to  the  “Quality  report  of  the  Household  Budget  Surveys 
2005”, provided by Eurostat (European Commission, 2005).  

Procedure 

For  the  distributional  analysis  for  private  households  (task  1)  we  calculate  the  VAT 
liability  on  private  household  consumption  expenditures  in  2011  as  well  as  in  reform 
scenarios 1 and 2. From our data we know how much households in the EU-27 Member 
States spend on goods and services. From this information we deduce how much VAT 
they had to pay on their consumption, using information on VAT rates applicable in the 
respective countries. However, it is likely that some fraction of household expenditure 

Study on VAT rates structure 

 
 
 
 
42 

is made abroad, leading to different VAT payments due to different VAT rates. We do 
not know the share of expenditures spent abroad or in which country money was spent 
and assume that all expenditures take place in the Member State where the HBS data is 
from. For each country, we associate the categories of goods and services with the VAT 
rate they are taxed with. We apply the rates to the most detailed classification available 
and  calculate  weighted  averages  for  the  average  household  and  each  sub-group  of 
interest. The assumptions we made when associating expenditure categories with VAT 
rates  are  listed  in  the  Addendum,  delivered  with  this  report;  it  also  contains  more 
detailed  country  analyses.  The  spreadsheets,  also  delivered  with  this  report,  contain 
additional,  detailed  country  tables.  A  reading  instruction  for  these  spreadsheets  is 
provided in the Addendum. In addition, this Addendum contains a comprehensive list 
of  assumptions  we  made  when  applying  the  VAT  rates  to  the  data.  Moreover,  every 
country chapter contains a short introduction to the relevant national VAT system.  

Regarding  our  assumptions  on  VAT  rates  on  passenger  transport  services,  two  issues 
should  be  kept  in  mind.  First,  our  data  does  not  distinguish  between  expenditures  on 
domestic  or  international  transport  services.  In  many  countries,  though,  VAT  rates 
differ depending on whether the service was domestic or international. Second, even if 
we could distinguish the two, we would still be ignorant as to the specific destination 
and  transit  countries  involved  or  how  travel  costs  are  divided  between  countries, 
information  that  would  be  necessary  to  accurately  calculating  VAT  on  transport.34 
Researching  the  exact  share  of  transport  expenditures  accruing  to  domestic  or 
international  transport,  respectively,  for  each  Member  State  would  require  a  tedious 
exploration  of  a  vast  number  of  different  data  sources.  This  venture  would  be  even 
further  complicated  by  obtaining  information  on  the  travel  destinations.  Given  the 
comparably  small  amount  of  household  expenditures  spent  on  transport  services  (on 
average over the EU-27 1.4 % of household expenditures, ranging from 0.7 % in Spain 
to  2.5 %  in  Latvia)  this  effort  is  not  reasonable.  We  therefore  make  simplifying 
assumptions.35  We  use  the  domestic  rate  for  all  modes  of  transport  apart  from  air 
travel.36 

34  Passenger  transport  services  are  taxable  where  they  are  performed.  In  case  of  cross-border  (intra-

community) transport services VAT applies proportionate to the distance covered. 

35 Some Member States further distinguish VAT rates on passenger transport, e.g. depending on whether 
the  rail  transport  is  long-  or  short  distance  or  whether  the  transport  service  is  scheduled  or  not.  The 
assumptions made to deal with these issues are listed in the Addendum. 

36 For transport services by rail we base this assumption on data provided by Eurostat, stating that EU wide 
international passenger transport by rail makes up less than 6 % of total passenger transport by rail. (See 
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Passenger_transport_statistics, 
2013/08/23)  

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We deviate from this general assumption for passenger transport by air and apply the 
rate  for  international  flights  (a  zero  rate  in  all  Member  States),  as  Eurostat  data37 
indicate  that  this  transport  mode  is  predominantly  international.  Even  for  countries 
where  more than  10 %  of total air  travel  is  national  (seven  countries38,  Italy  leads  the 
ranking with a share of 27 %) we assume that private households spend most of their 
expenditures on flights on international flights.39 Therefore we keep the assumption of a 
zero  rate for  expenditures on  air travel for  all Member  States.  This assumption  is  not 
quantitatively important: Taxing all expenditures on transport by air in Italy, Spain and 
Sweden (the countries with the highest share of domestic flights) with the domestic rate 
would lead to increases in average VAT expenditures by € 3 to € 4. 

Unless stated otherwise, the following supplies are exempted in all Member States40:  
 

imputed rentals for housing41 (CP041) 

For transport by road and sea/inland waterway EU-wide data on the share of national and international 
transport are not available. Regarding transport by road the assumption that household expenditures are 
mostly  spent  on  national  services  seems  sensible.  Regarding  transport  by  sea  or  inland  waterway  one 
would need to go further into detail on whether expenditures are higher on transport on inland waterways 
or  on  sea,  and  whether  the  routes  are  national  or  international.  Again,  the  share  of  expenditures  on 
passenger transport by sea and inland waterway is very small (on average 0.05 %, highest in Malta with 
0.2 %) such that we refrain from this option and use the simplifying assumption that all expenditures on 
this transport mode are for domestic services only. 

37  http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database,  Transport,  Air  Transport, 
Air transport measurement – passengers, Overview of the air passenger transport by country and airports, 
Air passenger transport by reporting country [2013/08/09] 

38 UK (10 %), DE (14 %), FI (17 %), FR (21 %), ES (23 %), SE (24 %), IT (27 %) 
39  National  flights  are  presumably  more  important  for  business  clients  or  tourists.  In  case  households  fly 

nationally they presumably spend less money on these flights than they do on international ones.  

40 The EU VAT Legislation contains two sorts of exempt supplies. Supplies mentioned in Annex X/b (e.g. 
telecommunication services, services provided by artists or members of free professions, supply of water 
by public institutions etc.) can be exempted from VAT. Other supplies such as those mentioned in Article 
132 (postal or hospital services, social security, education, etc.) or in Article 135 (insurance and financial 
services, some supplies related to immovable property, etc.) have to be exempted from VAT. 

41  Comprehensive  measures  of  consumption  and  income  both  need  to  incorporate  housing  as  a  major 
element.  This  is  complicated  by  the  fact  that  housing  consumption  and  housing  income  are  often  not 
observable  cash-flows.  Most  importantly,  owner-occupiers  can  be  thought  of  as  implicitly  paying 
themselves  a  (notional  or  imputed)  rent  for  their  property:  in  their  capacity  as  occupiers  they  are 
consuming a valuable stream of ‘housing services’, and in their capacity as owners they are receiving an 
‘in-kind’ income in the form of those services. 
The consumption value of living in a property is given by the market rental value of the property being 
occupied.  This  is  observed  in  the  data  for  those  households  who  rent  their  property  from  a  private 
landlord. To consider the rental value for owner-occupiers or for tenants of ‘social landlords’ (paying a 
rent  which  is  typically  lower  than  the  market  rent)  National  Accounts  data  as  well  as  most  Household 
Budget Surveys contain imputed rents as part of household consumption. Since consuming dwellings one 
owns  involves  no  monetary  transaction,  imputed  rents  are  not  liable  to  VAT.  In  accordance  with  the 

Study on VAT rates structure 

 
 
                                                                                                                                              
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  actual rentals paid for housing (CP042) 
  out-patient and hospital services (CP062 and CP063) 
  postal services (CP081) 42 
  games of chance (CP0943) 
  education (CP10)43 
 
 
 

social protection (CP124) 
insurance services (CP125) 
financial services (CP126) 

We assume households do not adjust their consumption; that is, following the reform, 
they  buy  the  same  basket  of  goods  and  services  as  before.  This  is  a  simplifying 
assumption, as  zero and reduced VAT rates distort consumption choices because they 
change  relative  prices.  The  abolition  of  zero  and  reduced  rates  would  have  a 
substitution  effect  (as  consumers  switch  away  from  products  and  services  that  were 
previously taxed at favourable rates) and an income effect (as overall purchasing power 
decreases following an effective VAT increase), and the removal of the price distortion 
caused  by  VAT  could  lead  to  an  increase  in  consumer  welfare  (that  is,  the  utility 
consumers  derive  from  the  bundle  of  goods  they  purchase).  The  magnitude  of  these 
effects  depends  on  the  change  in  the  effective  VAT  rate  and  the  relevant  demand 
elasticities.44  

approach used in IFS et al. (2011), we include expenditures on imputed rents when calculating average 
expenditures,  but  treat  these  payments  as  VAT  exempt.  (Changing)  VAT  rates  on  the  purchase  or 
construction of dwellings by private households cannot be captured with the data at hand.  

42 For the purposes of our analysis we treat all postal services as exempted from VAT, even though services 
not provided by universal postal services providers are usually subject to the respective standard rate of a 
country. This approach has two reasons. First, average household expenditure on postal services in EU 
Member  States  only  makes  up  a  marginal  part  of  total  household  expenditure  (this  share  is  highest  in 
Malta with 0.14 %), allowing for a rather simple assumption. Second, universal postal services providers 
still  hold  major  market  shares  in  all  EU  Member  States,  though  this  varies  between  different  mailing 
segments and countries (see Copenhagen Economics, 2010). Assuming the opposite, i.e. taxing the whole 
sector at the standard rate, only leads to marginal changes in VAT expenditures. In Malta, for example, 
this would lead to an increase in VAT expenditures of less than € 5 for an average household. 

43  Some  expenditures  falling  in  category  CP10  “Education”  might  not  be  exempt  from  VAT,  such  as 
expenditures  for  school  excursions.  We  could  not  make  this  distinction  in  the  aggregate  data,  as 
expenditure on subgroups of CP10 (or even on the main aggregate) is rarely specified. Our simplifying 
assumption, therefore, is to exempt the whole category CP10. 

44  Alm  and  El-Ganainy  (2013)  find  that  for  a  sample  of  fifteen  EU  countries  the  effective  VAT  rate  is 
negatively  correlated  with  aggregate  consumption:  a  one  percentage  increase  in  the  VAT  rate  is 
associated  with  about  a  one  percentage  decline  in  per  capita  aggregate  consumption.  IFS  et  al.  (2011) 
estimate  the  effect  of  an  abolition  of  zero  and  reduced  VAT  rates  on  private  expenditures  for  five  EU 
Member States (Belgium, France, Germany, Spain and the UK) using a Quadratic Almost Ideal Demand 
System (QUAIDS) framework. While results differ between countries, they conclude that abolishing zero 

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VAT reforms also affect labour supply because they influence real wages, specifically, 
a  VAT  increase  would  be  expected  to  decrease  labour  supply  (because  consumption 
becomes more expensive in comparison to leisure, this mechanism is the same as in the 
case  of  personal  income  taxes).  Moreover,  a  VAT  on  work-related  expenses  such  as 
travel  or  clothing  could  provide  further  disincentives  for  work,  in  particular  for 
secondary earners (Metcalf, 1995).45  

In  addition,  we  assume  that  an  increase  in  VAT  rates  is  fully  incident  on  consumer 
prices.  From  a  theoretical  perspective,  the  degree  to  which  changes  in  VAT  rates  are 
passed-through (‘shifted’) onto consumer prices depends on the structure of the relevant 
market.  Consumption  taxes  may  be  under-,  fully  or  even  overshifted  onto  consumer 
prices; that is, prices can rise less, by the same amount or even more than VAT (IFS et 
al.  2011).  In  the  short-run  (i.e.  before  firms  can  adjust  their  capacity  to  a  change  in 
VAT rates and hence relative prices), in a perfectly competitive market (i.e. individual 
consumers and producers assume that they cannot influence the market price), VAT is 
passed onto consumer prices to a lower degree the more elastic the demand is. That is, 
the easier it is for consumers to substitute away from the good, the lower the fraction of 
the VAT increase that is passed onto them. Conversely, VAT changes are passed onto 
consumer prices to a higher degree for a given demand if the supply is elastic (that is, 
producers  curb  or  expand  production  readily  in  response  to  small  price  changes),  see 
e.g. Fullerton and Metcalf (2002). 

In a monopolistic market, VAT is expected to be fully shifted onto prices as firms have 
full  control  over  prices.  In  an  oligopolistic  market,  all  degrees  of  tax  shifting  are 
possible depending on the level of competition and supply and demand elasticities (i.e. 
how  strongly  supply  and  demand  react  to  changes  in  prices).  If  demand  reacts  more 
strongly  to  price  increases  than  to  price  decreases  (i.e.  if  the  demand  function  is 
sufficiently concave), price increases have a strong effect on demand if the price level is 
high,  i.e.  undershifting  might  occur  in  this  case.  Conversely,  if  demand  reacts  less 

and reduced VAT rates  would lead to a welfare  gain. Also, they  find that the distributive effect of this 
VAT reform – that is, the relative additional VAT burden for households according to expenditure deciles 
– is very similar to the static analysis. 

45 Blumkin et al. (2008) compare income and consumption taxes in an experimental framework. They find 
that consumption taxes discourage labour supply less than wage taxes, because of the temporal separation 
between  the  labour  supply  and  the  consumption  decision.  Metcalf  (1996)  estimates  the  labour  supply 
effects of a shift from income to consumption taxation. He finds that the adverse effects on labour supply 
are quite small in such a scenario. Lehmus (2011) analyses a similar reform scenario in a dynamic general 
equilibrium  model  with  heterogeneous  agents.  He  replaces  the  progressive  labour  tax  with  a  flat-rate 
consumption tax and also finds negligible changes in labour supply and gross labour income distribution. 

Study on VAT rates structure 

 
 
                                                                                                                                              
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sensitively  to  price  increases  (i.e.  the  demand  function  is  sufficiently  convex),  small 
price increases have a strong effect on demand if the price level is low, but the absolute 
decrease in demand diminishes as prices increase further. In this case, it might be more 
profitable for a firm to increase prices by more than the VAT increase, as the increase 
in price will be sufficient to more than offset the reduction in sales volume and possible 
rise in costs (Delipalla and Keen, 1992, and Carbonnier, 2006). 

The empirical literature confirms that markets that can be described as close to perfect 
competition  tend  to  feature  full  shifting,  while  less  competitive  markets  feature  both 
under- as well as overshifting of taxes, e.g. Delipalla and O’Donell (2001), Carbonnier 
(2007) and Smart and Bird (2009). Concerning the effect of an overall VAT rate change 
on the average price level, studies have found full or near-full shifting of taxes – at least 
in the long-run –, e.g. Copenhagen Economics (2007).  

To sum up, the theoretical and empirical literature provides inconclusive results on the 
degree  of  the  incidence  of  VAT,  with  both  under-  and  overshifting  being  possible 
depending  on  the  market  structure.  However,  both  the  theoretical  and  the  empirical 
literature suggests that pass-through of VAT onto consumer prices is generally closer to 
full-shifting  in  competitive  markets  and  for  broader-based VAT  changes.  In  line  with 
Copenhagen  Economics  (2007)  and  IFS  et  al.  (2011),  and  since  we  do  not  possess 
sufficient information  that would allow  us  to  define different  levels  of shifting  across 
countries  and  sectors  with  any  reasonable  certainty,  we  assume  full-pass  through  of 
VAT changes to prices. As the reform scenarios analysed here stipulate VAT changes 
for many broadly defined categories of goods and services (such as foodstuffs) in many 
countries, this assumption does not seem unreasonable.  

We  calculate  household  VAT  bills  on  average  as  well  as  broken  down  by  COICOP 
categories and household characteristics. The household characteristics we consider are 
the following:  
  Activity status of the household head46: 

-  manual worker in industry and services 
- 
- 

non-manual worker in industry and services 
employed  person  except  employees  (self-employed  person,  farmer  or 
agricultural worker) 

46  The  household  head  (or  the  household  reference  person)  is  usually  defined  as  the  household  member 
contributing  most  to  household  income.  However,  not  all  countries  follow  this  definition  (European 
Commission, 2005). 

TAXUD/2012/DE/323 

 
 
 
 
                                                      
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- 
- 
- 

unemployed person 
retired person 
other  inactive  person  (student  or  in  national  service,  person  exclusively 
dedicated to household duties / caregiving, person engaged in a non-economic 
activity, person unable to work) 

 

  Number of active persons in the household: “active” includes all employed persons 
from above (workers, self-employed, farmers) as well as unemployed persons. 
Income  quintile:  For  each  country  households  are  sorted  according  to  their 
household  income47  (from  poorest  to  richest)  and  then  divided  into  five  equally 
sized groups. The 20 % of households with the lowest household income make up 
the  first  quintile,  the  next  20 %  the  second  quintile  and  so  on.  The  fifth  quintile 
contains the 20 % of households with the highest household income.  

  Household type: Households are separated according to the number and age of their 
members (number of adults and dependent children; a dependent child is a person 
aged 15 years or younger, or a person aged 23 years or younger if the person is not 
yet active on the labour market, i.e. not working and not unemployed). 

  Age of the household head48 

In order to analyse the distributional consequences of the current VAT rates structure 
and of prospective reforms we calculate VAT payments in absolute values as well as in 
proportion to total expenditure. As a measure of the living standard of a household we 
refer to the income quintile the household belongs to. Data on expenditure is sometimes 
considered to be a better measure of living standards  than income  because it conveys 
more  information  on  households’  well-being  over  the  life  cycle  (e.g.  Crossley  et  al., 
2009, IFS et al. 2011). This is because individuals can smooth their consumption over 
the  life-cycle  by  borrowing,  saving,  and  subsequently  drawing  on  their  savings.  An 
individual  in  her  peak  earning  years  with  a  high  savings  rate,  for  example,  would 
appear to be less affected by VAT because of her low consumption expenditure. As a 
retiree, however, she would be hit by the tax, as she uses up her savings to complement 
her decreased income. She would not be spared from incurring VAT payments, but only 

47 We assume household incomes were not equivalised in this procedure. “Equivalisation” intends to make 
income  comparable  across  differently  sized  households.  This  adjustment  typically  consists  of  dividing 
expenditure  by  the  modified  OECD  scale.  This  scale  gives  a  weight  of  one  to  the  first  member  of  the 
household, a weight of 0.5 to every additional adult member and a weight of 0.3 to every child living in 
the household. This approach assumes economies of scale in consumption. A  family of two adults and 
one child would thus have to earn 1.8 times as  much as a single person to be considered as having the 
same “equivalised” income.  

48 The information on all definitions was obtained from European Commission (2006). We could not verify 

whether every country followed these definitions.  

Study on VAT rates structure 

 
                                                      
48 

defer  them  over  time.  As  pointed  out  by  IFS  et  al.  (2011),  ideally,  we  would  be 
interested in the impact of VAT on the lifetime-rich versus the lifetime-poor. However, 
data  on  lifetime  income  and  lifetime  expenditure  are generally  not  available.  Because 
consumption expenditure varies less over the life-cycle than income, it can be argued to 
be  more  informative  of  individual  lifetime  resources  than  income  (Crossley  et  al., 
2009). 

Also, whether the VAT burden of a household is measured in terms of VAT payments 
as a percentage of income or expenditure has implications on whether a VAT system 
appears  to  be  distributionally  regressive,  neutral  or  progressive.  This  is  because 
households’  savings  rate  varies  with  income:  low  income  households  tend  to  spend 
more  than  their  income,  while  high  income  households  tend  to  spend  less  than  their 
income (IFS et al. 2011, Carrera 2010).  

When looking at VAT payments as a proportion of expenditure, across the expenditure 
distribution49, VAT will appear more progressive than when looking at VAT payments 
as  a  proportion  of income,  across  the income  distribution.  Because  many  low  income 
households have expenditures higher than their income, the VAT burden on low income 
households measured as a fraction of their income will appear high, making the VAT 
system look regressive. On the other hand, looking at VAT payments as a percentage of 
expenditure, over the expenditure distribution, will make the system look progressive, 
because  low  expenditure  households  tend  to  spend  a  higher  fraction  of  their  total 
expenditure on zero and reduced rated items than high expenditure households, which 
will  result  in  a  lower  VAT  burden  on  low  expenditure  quintiles  when  measured  as  a 
percentage  of  expenditure.  The  VAT  system  will  look  even  more  progressive  when 
assessed  based  on  VAT  payments  as  a  proportion  of  income,  across  the  expenditure 
distribution, because low spending households generally have incomes exceeding their 
spending,  leading  to  a  low  ratio  of  VAT  payments  to  disposable  income,  while  the 
reverse is true for high spending households. Carrera (2010) shows that, when looking 
at quintiles of the expenditure distribution, VAT as a percentage of disposable income 
increases  in  the  UK,  hence  makes  the  system  appear  progressive,  while  it  decreases 
over the income distribution, implying it to be regressive.  

49 That is, we define households with high expenditures as rich, and those with low expenditures as poor. If 
we use the income distribution as a benchmark, we define those with low incomes as poor, and those with 
high incomes as rich. As argued above, the expenditure distribution might carry more information on life-
time resources, but one still might prefer to use the income distribution. 

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This  introduces  some  ambiguity  into  the  assessment  of  the  progressivity  of  VAT 
systems. However, it can be argued, that measuring VAT as a proportion of income can 
be  misleading  (IFS  et  al.  2011).  Consider  the  example  of  an  economy  where  lifetime 
income  equals  lifetime  expenditure  (that  is,  there  are  no  bequests),  individuals  can 
borrow  and  save,  and  there  is  a  uniform  VAT  rate  on  all  goods  and  services;  in  this 
case, the VAT system would not influence the distribution of resources in the economy 
(everyone  would  pay  the  same  fraction  of  their  lifetime  resources  on  VAT).  When 
assessing this VAT system empirically using a cross section of income and expenditure 
data, we would correctly identify this VAT system to be distributionally neutral when 
looking at VAT payments as a fraction of expenditure, regardless of whether we look at 
the income or expenditure distribution. When looking at VAT payments as a proportion 
of income, however, we would judge it to be regressive if individuals with high income 
save,  and  those  with  low  income  borrow,  when  looking  at  the  income  distribution. 
When  looking  at  the  expenditure  distribution,  we  would  mistakenly  judge  it  as 
progressive.  

Total VAT liabilities of households 

Because of a host of potential problems with Household Budget Surveys (as discussed 
above)  we  use  another  data  source  (WIOD  data,  see  below)  to  estimate  households’ 
total  liabilities  as  well  as  any  changes  in  revenues  due  to  changes  in  the  VAT  rates 
structure (task  3).  Using  this  database  not  only  gives  us  more  accurate  estimations  of 
the  static  revenue  effects,  estimation  of  revenues  obtained  from  households  are 
furthermore  congruent  with  the  calculations  of  those  obtained  from  non-household 
entities.50  The  WIOD  database  is,  among  others,  based  on  National  Accounts,  which 
are,  in  turn,  based  on  the  information  provided  by  the  Household  Budget  Surveys. 
However,  both  NA  and  WIOD  data  include  additional  estimates for  underrepresented 
categories or households that are not part of the reference population in the Household 
Budget  Surveys.  It  has  to  be  noted,  however,  that  HBS,  NA  and  WIOD  all  exhibit 
different  expenditure  structures,  which  can  lead  to  different  estimations  of  average 
VAT  rates.  We  will  discuss  this  issue  briefly  below  and  draw  attention  to  it  when 
necessary while discussing the results.  

50 For this reason we also refrain from the possibility to calculate additional VAT revenues for households 
based on National Accounts data. Although basing on each other there are differences in total household 
expenditures  as  well  as  in  expenditure  structures  between  NA  data  and  the  WIOD  database  for  most 
countries.  

Study on VAT rates structure 

 
 
 
                                                      
50 

Scenario  3  calculates  by  how  much  households  defined  as  low-income  households 
would have to be compensated in scenario 1 in order to be able to buy the same bundle 
of  goods  and  services  as  in  the  base  scenario.  We  use  two  definitions  of  low-income 
households  based  on  income  quintiles.  In  scenario  3a  we  compensate  the  40 %  of 
households with the lowest incomes (first and second income quintiles); in scenario 3b 
we  compensate  the  20 %  of  households  with  the  lowest  incomes  (first  quintile  only). 
Scenario  3  calculates  the  additional  VAT  liabilities  that  can  be  expected  from 
abolishing  zero  and  reduced  rates  even  though  especially  vulnerable  groups  are 
compensated for their increase in VAT such that they are able to buy the same bundle 
of supplies as before the reform.  

In  order  to  compensate  especially  vulnerable  households  for  an  increase  in  VAT, 
vulnerable households have to be specified. There is a vast literature on the definition 
and  measurement  of income  inequality  and poverty,  and  some  approaches  stress  non-
economic components to well-being such as health or varying needs across individuals 
(see e.g. Sen, 2000). As far as income inequality is concerned, the concept of income 
quintiles has a number of practical advantages, e.g. it can deal with negative incomes 
and is invariant to the scale in which income is measured. It is not the only measure that 
satisfies these requirements, others include the Gini-Coefficient (see e.g. Cowel, 2000), 
the income quintile share (S80/S20) ratio or the at-risk-of-poverty (ARP) rate. The two 
latter measures are the most commonly used ones according to Eurostat (2013b). The 
income quintile share is the ratio of total income received by the fifth income quintile to 
that  of  the  first  income  quintile  (income  in  terms  of  equivalised  disposable  income) 
(Eurostat, 2013a),  while the  ARP  rate  is  the share  of  the  population  whose income  is 
lower than the at-risk-of-poverty threshold of 60 % of the median (equivalised) income 
(Eurostat,  2013a).  Households  at-risk-of-poverty  would  be  a  candidate 
for 
compensation  in  the  present  analysis;  however,  our  data  does  not  contain  this 
information.  While  we  would  expect  a  substantial  overlap  between  households  in  the 
first  and  second  income  quintiles  with  those  at-risk-of-poverty,  and  the  poorest 
households would be considered poor according to both measures, they do not need to 
coincide. For example, in a very egalitarian society, only the poorest households might 
have incomes that are lower than 60 % of the median income, so policy makers might 
not  even  want  to  compensate  the  entire  first  income  quintile;  in  a  society  with  an 
income distribution that features many equally poor households, more than 40 % may 
have an income beneath the at-risk-of-poverty threshold. For the EU as a whole, around 
16 % of the population are currently at-risk-of-poverty (Eurostat, 2012). In the context 
of our study, this indicates that when compensating the first income quintile, we would 

TAXUD/2012/DE/323 

 
 
51 

compensate  those  households  who  either  are  at-risk-of-poverty,  or  barely  escape  this 
definition. When we also compensate the second income quintile, while we would be 
still  compensating  those  with  incomes  below  the  median,  we  would  be  compensating 
many households towards the centre of the income distribution. While income quintiles 
are the only measure we can use in this study because of the data availability, they are a 
heavily used measure in the empirical literature (e.g. OECD (2008) and OECD (2011), 
IFS (2011) to name a few). It is however a drawback that our data do not reveal more 
about the composition of the income quintiles with regards to household type, activity 
status  etc.  This  is  also  the  reason  why  we  cannot  make  a  distributional  analysis  of 
scenario 3 for other aspects of household characteristics: We simply do not know how 
many  households  with  children  or  households  headed  by  a  retired  head  will  be 
compensated according to our definition. 

As discussed in detail above, both income and expenditure can be used as a measure of 
material  well-being,  but  representing  VAT  payments  as  a  percentage  of  total 
expenditure  is  a  more  accurate  measure  of  the  relative  VAT  burden  of  a  given 
household.  Compensating  low  income  households  (as  opposed  to  low  expenditure 
households) for their losses after a VAT increase makes sense if life-time income is not 
equal  to  life-time  expenditure  (that  is,  individuals  with  high  savings  rates  will  not 
ultimately consume their savings and therefore be hit by VAT at a later point in life). In 
this  case,  compensating  low  expenditure  individuals  would  be  akin  to  a  subsidy  to 
savings, and not necessarily benefit the life-time poor. 

As there is no information on income distribution in the WIOD tables, we use HBS and 
NA data to calculate the share of additional VAT payments that accrue to low income 
households.51 Specifically, when calculating the budget effect of the reform, we subtract 
the fraction of the additional VAT paid by low income households, as estimated with 
HBS and NA data, from the additional revenue calculated using WIOD data, because 
this fraction is assumed to be used to compensate low income households for the reform 
by enabling them to buy the same basket of supplies as before the reform. 

51 In some countries expenditure structures are similar in HBS and NA data. When this is the case, it does 
not matter whether we calculate the share of the additional VAT burden arising from scenario 1 accruing 
to low income households with HBS data only or with a combination of HBS and NA data. However, for 
countries with deviating expenditure structures (and thus deviating average VAT rates on the households’ 
consumption)  the  shares  calculated  with  HBS  and  NA  data  typically  differ.  As  we  are  interested  in 
additional  revenues  and  NA  data  are  more  appropriate  to  calculate  revenues,  we  prefer  using  the 
combination of HBS data (from  which  we obtain the shares in expenditure of low income households) 
and NA data (from which we obtain the average VAT rates). 

Study on VAT rates structure 

 
 
                                                      
52 

Analysis for non-households  

We estimate for each Member State how much, broken down by category of goods and 
services,  the  different  types  of  non-households  would  have  to  spend  on  irrecoverable 
VAT payments in the status quo and in scenarios 1 and 2.52  

The estimation involves the following tasks and data: 
  Gathering  relevant  data  for  tax  rates  by  product,  following  the  59-product 
classification (see section A.4 in the Annex) in the Eurostat tables, as updated by 
WIOD53, and collecting comparable data on exemptions;  

  Estimating the 2011 use tables, extrapolated from the 2009 WIOD tables;  
  Estimating the propex factor (percentage of sector output which is exempted from 
VAT, and which therefore cannot recover VAT on inputs) for each of the 35 sectors 
considered  in  the  WIOD  classification,  as  well  as  other  items  that  increase  the 
amount of unrecoverable VAT (small business exemptions, limits on deductibility 
of expenses on company cars and expenses for entertainment purposes); 

  Estimating the percentage of Gross Fixed Capital Formation (GFCF) belonging to 

non-household, non-government sectors which are exempt from VAT. 

Details on each of these components are as follows. 

Calculations of VAT rates and exemptions  

We calculate VAT rates for 59 CPA (Classification of Product Activities) supplies for 
all EU countries, for 2011 (7,965 cases total, NACE Rev 1 classification). Relevant data 
sources include:  
  EU TAXUD publications on VAT rates (European Commission, 2011a),  
 
 
 

International Bureau of Fiscal Documentation (IBFD) database on VAT rates54,  
IBFD publication of national tax codes and  
IBFD taxation news to track any changes in the legislation. 

The estimation involved several steps:  

  We  constructed  VAT  rates  for  each  of  the  2,531  6-digit  CPA  supply  categories, 
using the IBFD database. All EU countries taken together, we defined VAT rates 

52  In  addition,  as  mentioned  above  (p.  46),  changes  in  VAT  liabilities  in  total  (for  households  and  non-

households) are calculated based on the data and procedure described below.  

53 World Input-Output Project, available at http://www.wiod.org/database/nat_suts.htm [2013/03/26] 
54 See http://www.ibfd.org/ [2013/07/04]. The referenced database is available by subscription only. 

TAXUD/2012/DE/323 

 
 
 
 
 
 
                                                      
53 

for  68,319  cases.  However,  even  at  this  level  of  detail,  in  2,727  cases  it  was  not 
possible to define a single VAT rate applying to the entire category. For example, 
different  VAT  rates  commonly  apply  to  international  and  domestic  transport 
services, which fall into the same 6-digit CPA category.  In cases as this, we took 
note  of  the  possible  differing  VAT  rates,  and  used  additional  assumptions  when 
aggregating those rates to the 2-digit level.  

  With respect to standard vs. reduced rates or exemptions, we found that in 80 % of 
all  68,319  cases,  the  standard  VAT  rate  applies  to  the  category  in  question.  The 
remaining  cases  (13,341)  are  either  taxed  at  a  reduced  rate  or  exempt.  We 
researched rates applying to these categories in the relevant appendices of national 
tax codes or EU TAXUD publications. 

  Finally, we aggregated the 6-digit CPA VAT rates into 59 2-digit categories (a total 

of 1,674 total cases per annum). 

2011 Use tables: choice and estimations 

There are three different types of use tables that are widely available and comparable 
across  countries:  EUROSTAT  NACE  Rev  1,  EUROSTAT  NACE  rev  2  and  WIOD 
(which  provides  estimates  for  all  countries,  albeit  based  on  2007/2008  original  data). 
For  ease  of  comparison  across  countries,  we  chose  to  use  the  WIOD  database  and 
proceeded  to  forecast  the  2011  use  tables  through  rescaling  based  on  actual  National 
Accounts data for Final Demand and Intermediate Consumption. 

Propex factor (unrecoverable VAT on inputs in exempt entities) 

Due to the lack of data on the number of supplies that are exempt from VAT at the level 
of  disaggregation  of  the  WIOD  tables,  we  have  adopted  the  propex  methodology 
developed  by  Reckon  consultancy  in  the  estimation  of  the  VAT  gaps  (Reckon  LLP, 
2009).  In  a  nutshell,  this  methodology  consists  of  assuming  that  the  share  of  output 
within  a  2-digit  NACE  sector  reflects  the  share  of  inputs  used  to  produce  that  set  of 
goods  and  services.  For  example,  “postal  services”,  which  belong  to  “Post  and 
telecommunication  services”  NACE  rev  1  I.64  sector,  are  exempted  in  Austria  and 
other Member States. We assume that the propex (or the share of VAT non-deductible 
inputs) for I.64 sector is equal to the share of “postal services” output in the total “Post 
and telecommunications” sector total output. 

Study on VAT rates structure 

 
 
 
 
 
54 

We used this method to compute propex for all exempt activities, with the exception of 
the financial services sector, for which we use estimates based on information gathered 
through communications from national authorities.55  

We also allowed for restrictions generally imposed on firms to deduct VAT related to 
the purchase of cars, as well as for purposes of entertainment. Finally, and again on the 
basis of country submissions, we estimate the number of small businesses (businesses 
below  the  threshold  for  VAT  registration  in  countries  that  have  such  thresholds)  that 
might choose to register in order to recover VAT on their inputs. 

GFCF not attracting VAT 

Entities that are exempt or sell exempted goods are also unable to recover VAT on their 
expenditures  on  GFCF  (Gross  Fixed  Capital  Formation).  In  order  to  estimate  this 
unrecoverable liability, we first disaggregate the GFCF data provided in the use tables 
(GFCF  is  recorded  as  a  single  column,  distributed  among  the  59  products)  between 
non-financial  corporations,  financial  corporations  and  other  economic  agents 
(government,  households,  non-profits).  We  then  use  data  provided  by  national 
authorities  to  calculate  the  average  VAT  rate  on  purchases  of  goods  and  services  for 
GFCF purposes by exempt entities. 

Comparison of average effective VAT rates 

For  both  analyses  on  private  households  (task  1  distributional  analysis  and  task  3 
additional revenues) we calculate average effective VAT rates. The analysis on task 1 is 
based on HBS data, the analysis of task 3 on WIOD data. The resulting rates differ (see 
Table  4).  For  most  countries  the  deviations  are  acceptable,  given  the  fact  that  the 
average  VAT  rates  depend  on  the  expenditure  structure  and  that  there  are  necessary 
differences  between  data  taken  directly  from  surveys  and  data  incorporating  other 
sources as well.56 

For  the  following  countries,  however,  the  gap  amounts  to  more  than  1.5  percentage 
points,  with the average  VAT  rate  from  HBS  data  being  larger than  the  one  obtained 
from WIOD data: 

55 Generally, financial services are exempt from VAT, with a few exceptions. In some countries, VAT is 

recoverable for exports of financial services to non-EU countries. 

56  See  the  short  discussion  above  on  supplies  typically  underestimated  in  survey  data  and  populations 

excluded from the sample population.  

TAXUD/2012/DE/323 

 
 
 
 
 
                                                      
55 

  Czech Republic (1.6 percentage points) 
  Hungary (5.4 percentage points) 
  Latvia (3.4 percentage points) 
  Malta (1.8 percentage points) 
  Austria (1.6 percentage points)  
  Romania (4.0 percentage points)  

The  fact  that  rents  are  not  imputed  in  HBS  data  contributes  considerably  to  the 
divergences  between  the  results  from  the  two  data-sources  in  the  Czech  Republic, 
Hungary, Malta and Romania. In these countries household expenditures are calculated 
without adding this notional consumption expenditure. Since imputed rents are exempt 
(because  no  actual  transaction  takes  place)  including  them  in  total  household 
expenditure  automatically  reduces  the  average  VAT  rate.  Comparing  the  HBS  to  the 
NA  data  (which  do  contain  imputed  rents)57  shows  a  difference  in  the  average  VAT 
rates  for  these  countries  (average  VAT  rates  of  12.3 %,  17.3 %,  9.2 %  and  17.1 %  in 
NA data for the Czech Republic, Hungary, Malta and Romania, respectively). Also for 
Latvia,  the  difference  to  the  average  VAT  rate  calculated  from  NA  data  (which  is 
15.9 %)  is  considerable.  Primarily  responsible  for  this  divergence  is  that,  in  some 
expenditure categories, there are marked differences in the distribution of expenditure 
over sub-categories between the two datasets. For example, CPO4 has a higher share of 
exempt  rents  in  the  NA  data,  or  in  CP12,  exempt  insurance  and  banking  services  are 
more important as a fraction of total expenditure in the NA data than in the HBS data. 
For Austria there is a difference between rates obtained from HBS and NA data as well, 
even though not as big as in the other countries analysed above.58 

57 The WIOD data are based on NA data; a comparison to WIOD data nevertheless is not straightforward, 

as WIOD data uses a different categorization of goods and services, see above.  

58 The rate estimated from NA data amounts to 12 %, which is closer to the rate estimated from WIOD data 
(11 %). Some categories are taxed at a lower rate in NA due to a higher share of exempt supplies within 
the  main  categories  (CP04  with  a  higher  share  in  imputed  rents,  CP06  with  a  higher  share  in  health 
services,  CP08  with  a  higher  share  of  postal  services).  Tables  on  this  and  the  other  comparisons  are 
available upon request. 

Study on VAT rates structure 

 
                                                      
56 

Table 4: Comparison of average effective VAT rates in 2011 in HBS and WIOD 

Country 

HBS data 

WIOD 
data 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

11.1% 
14.8% 
13.8% 
15.3% 
10.1% 
14.6% 
13.0% 
7.7% 
9.0% 
9.7% 
9.3% 
7.3% 
18.1% 
17.2% 
6.6% 
21.2% 
11.2% 
8.3% 
12.8% 
11.9% 
9.9% 
21.7% 
11.7% 
15.9% 
12.3% 
13.3% 
8.6% 

10.0% 
13.6% 
12.3% 
14.8% 
10.0% 
15.0% 
12.2% 
8.3% 
10.3% 
8.7% 
10.2% 
6.4% 
14.7% 
17.2% 
8.0% 
15.8% 
9.4% 
8.3% 
11.3% 
11.4% 
11.3% 
17.7% 
11.4% 
14.9% 
11.2% 
12.2% 
9.7% 

Source: WIOD, Household Budget Surveys, National Accounts (Eurostat), own calculations. 

This problem also affects reform scenario 2, where a new budget neutral standard rate is 
applied to all supplies not exempt from VAT. The simulation of scenario 2 with WIOD 
data  suggests  a  decline  in  aggregate  VAT  payments  of  households  for  Estonia,  Italy, 
Lithuania  and  Romania.  Simulating  scenario  2  with  HBS  data  arrives  at  the  same 
results for Estonia, in the other countries listed above it predicts an increase in the VAT 
burden  of  private  households.  On  the  other  hand,  HBS  data  predict  a  decrease  in  the 
VAT bill of households in Denmark, Latvia and Hungary, while WIOD data calculate 

TAXUD/2012/DE/323 

 
 
57 

an increase. Also, the gaps between the situation in 2011 and scenario 2 are different in 
some countries. HBS data predict a much higher increase for France (21 % compared to 
2 % according to WIOD data), Luxembourg (27 % compared to  10 %), Poland (13 % 
compared  to  4 %),  Portugal  (16 %  compared  to  3 %) and  the  UK (16 %  compared  to 
5 %).  

Again,  a  detailed  analysis  of  the  differences  between  HBS  and  WIOD  data  is  not 
straightforward. Looking at the differences between HBS and NA data – both of which 
use the same classification of goods and services – we get significant differences in the 
average VAT rates, originating in different shares of consumption for specific supplies. 
In  most  countries  we  observe  large  discrepancies  in  CP04  (relation  between  imputed 
and actual rents as well as share of other expenditures in this category compared to  – 
usually exempt  – rents), CP12 (share of insurances and financial activities) and CP02 
(alcohol and tobacco).  

Although it is not desirable to work with different average  VAT rates in the analysis, 
we do not have a choice, as HBS data are the only available data source for the analysis 
of the distributional effects of the VAT  rates structure. This problem should therefore 
be kept in mind, and we will mention it in the remainder of the report whenever some 
results  deviate  strongly  from  results  based  on  WIOD  data.  In  order  to  maintain 
consistency in the calculation of additional VAT revenues due to the reform scenarios 
(section  2.5)  we  calculate  these  based  on  WIOD  data  for  all  institutional  sectors 
(households and non-households).  

2.2  Results: Overview  

This  section  provides  a  bird’s  eye  view  of  the  overall  VAT  liability  in  2011,  and  the 
VAT liabilities of institutional sectors (see below). Table 5 toTable 9 provide baseline 
information  for  the  EU-27.  Table  5  and  Table  6  show  three  institutional  sectors: 
Households,  Intermediate  Consumption  and  Others.  Intermediate  Consumption 
accounts  for  the  VAT  liability  on  inputs  of  sectors  producing  exempt  goods  and 
services;  exempt  sectors  cannot  recover  VAT  liabilities  on  production  inputs.  The 
category  “Others”  subsumes  non-recoverable  VAT  liability  relating  to  government 
consumption,  Non-Profit  Institutions  Serving  Households  (NPISHs)  and  Gross  Fixed 
Capital  Formation  (GFCF)  activities  by  exempt  sectors,  and  other  small  adjustments. 
Table  7 toTable  9  provide  more  detailed  information  on  the  most important  (exempt) 
sectors, government consumption, NPISHs and GFCF.  

Study on VAT rates structure 

 
 
 
58 

Overall,  in  2011,  the  Household  sector  accounts  for  an  average  of  60 %  of  all  VAT 
liability in the EU-27 countries. Unrecoverable VAT liabilities from intermediate inputs 
purchased by sectors producing exempt  supplies account for 19 %, and the remaining 
21 %  accrue  to  the  Government,  NPISHs  and  unrecoverable  VAT  on  GFCF 
expenditures of exempt sectors. There is considerable dispersion in these ratios across 
the EU, with the share of Household consumption on total VAT liabilities ranging from 
a low of 35 % in Luxembourg, to a high of 74 % in Lithuania. This range reflects both 
the  existence  of  multiple  rates  and  of  exemptions  (for  instance,  the  low  value  for 
Luxemburg is due to the importance of financial services in the economy). 

While statutory VAT rates range from 15 % to 25 % across the European Union, there 
is  a  much  wider  dispersion  of  effective  rates59  faced  by  the  institutional  sectors 
considered  in  our  analysis.  For  instance,  Household  Consumption,  once  zero  and 
reduced  rates  and  exempt  supplies  are  taken  into  account,  faces  an  effective  rate  that 
ranges  from  6 %  in  Cyprus  (standard  rate  15 %)  to  18 %  in  Romania  (standard  rate 
24 %).  Sectors  producing  exempt  goods  and  services  (the  sector  Intermediate 
Consumption) face an effective VAT rate ranging from 2 % in Luxembourg to 17 % in 
Romania. Effective rates faced by government and NPISH range from less than 1 % in 
Greece or Cyprus to 5 % in Romania due to a high share of exempted  or non-taxable 
expenditures (e.g. salaries of teachers) in total government final consumption. 

59  We  calculate  the  effective  VAT  rate  by  dividing  VAT  liabilities  by  the  tax  base  (net  expenditures). 
Contrary  to  the  standard  VAT  rate  the  effective  VAT  rate  informs  about  how  much  the  different 
institutional sectors really pay on their consumption, taking into consideration zero and reduced rates as 
well as exemptions.  

TAXUD/2012/DE/323 

 
 
 
                                                      
Table 5: 2011 Baseline VAT Liability (million Euros)60 

Country 

Total 

Statu-
tory 
Rate 

House-
hold 
Liability 

Percent 
of Total 

Effect. 
rate 

Interm. 
Cons. 

Percent 
of Total 

Effect. 
rate 

Others 

Percent 
of Total 

BE 

BG 

CZ 

DK 

DE 

EE 

EL 

ES 

FR 

IE 

IT 

CY 

LV 

LT 

30,612 

4,001 

15,481 

26,112 

219,804 

1,694 

24,813 

72,315 

175,004 

10,831 

133,938 

1,422 

2,340 

3,805 

21% 

20% 

20% 

25% 

19% 

20% 

23% 

18% 

20% 

21% 

20% 

15% 

22% 

21% 

16,845 

2,565 

8,573 

14,291 

129,502 

1,060 

17,686 

47,372 

104,721 

5,876 

90,607 

814 

1,570 

2,818 

55% 

64% 

55% 

55% 

59% 

63% 

71% 

66% 

60% 

54% 

68% 

57% 

67% 

74% 

10% 

14% 

12% 

15% 

10% 

15% 

12% 

8% 

10% 

9% 

10% 

6% 

15% 

17% 

6,788 

816 

3,805 

6,959 

38,895 

274 

3,266 

12,066 

24,875 

2,585 

15,290 

147 

464 

436 

22% 

20% 

25% 

27% 

18% 

16% 

13% 

17% 

14% 

24% 

11% 

10% 

20% 

11% 

10% 

14% 

14% 

16% 

10% 

14% 

15% 

9% 

12% 

8% 

9% 

7% 

12% 

16% 

6,979 

620 

3,102 

4,862 

51,406 

360 

3,861 

12,876 

45,407 

2,370 

28,041 

461 

306 

550 

23% 

15% 

20% 

19% 

23% 

21% 

16% 

18% 

26% 

22% 

21% 

32% 

13% 

14% 

Source: WIOD, EUROSTAT, IBFD, European Commission, Communications from national authorities and own calculations. 
The statutory rates depict the situation in 2011. 

59 

Total 
effect. 
rate 

8% 

11% 

10% 

11% 

8% 

11% 

10% 

7% 

8% 

7% 

8% 

5% 

11% 

13% 

Effect. 
Rate 
(Gov. 
and 
NPISH) 
1% 

2% 

3% 

1% 

2% 

2% 

0% 

1% 

2% 

1% 

3% 

0% 

1% 

2% 

60 Numbers in the column “Total” differ from actual VAT collected (as shown in Table 1). Here we calculate VAT liabilities, that is given the tax 

base and the respective VAT rates how much VAT households and non-households have to pay on VAT (see also section 2.1)  

Study on VAT rates structure 

                                                      
60 

Table 6: 2011 Baseline VAT Liability (million Euros), continued from Table 5 

Country 

Total 

Statu-
tory 
Rate 

House-
hold 
Liability 

Percent 
of Total 

Effect. 
rate 

Interm. 
Cons. 

Percent 
of Total 

Effect. 
rate 

Others 

Percent 
of Total 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

3,281 

11,630 

541 

46,146 

26,349 

35,241 

16,892 

21,789 

3,319 

7,573 

19,465 

38,067 

149,809 

15% 

25% 

18% 

19% 

20% 

23% 

23% 

24% 

20% 

20% 

23% 

25% 

20% 

1,135 

7,215 

377 

20,253 

16,632 

21,993 

11,505 

12,206 

2,237 

5,059 

10,010 

19,613 

95,391 

35% 

62% 

70% 

44% 

63% 

62% 

68% 

56% 

67% 

67% 

51% 

52% 

64% 

8% 

16% 

9% 

8% 

11% 

11% 

11% 

18% 

11% 

15% 

11% 

12% 

10% 

944 

1,963 

90 

13,693 

5,418 

6,268 

3,302 

2,466 

506 

1,133 

4,880 

10,095 

36,829 

29% 

17% 

17% 

30% 

21% 

18% 

20% 

11% 

15% 

15% 

25% 

27% 

25% 

2% 

14% 

8% 

11% 

12% 

13% 

13% 

17% 

12% 

13% 

15% 

14% 

10% 

1,203 

2,451 

74 

12,200 

4,298 

6,981 

2,085 

7,116 

576 

1,380 

4,575 

8,360 

17,590 

37% 

21% 

14% 

26% 

16% 

20% 

12% 

33% 

17% 

18% 

24% 

22% 

12% 

Average 
12% 
Source: WIOD, EUROSTAT, IBFD, European Commission, Communications from national authorities and own calculations. 
The statutory rates depict the situation in 2011. 

12% 

21% 

19% 

60% 

Effect. 
Rate 
(Gov. 
and 
NPISH) 
1% 

4% 

2% 

1% 

1% 

2% 

1% 

5% 

2% 

2% 

2% 

2% 

1% 

Total 
effect. 
rate 

3% 

13% 

8% 

7% 

9% 

9% 

9% 

15% 

9% 

12% 

9% 

9% 

8% 

2% 

9% 

TAXUD/2012/DE/323 

 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
 
61 

Table 7: Baseline VAT Liability for main exempt sectors and activities 

Total 
VTTL 

Total 
non-HH 

Post and Tele-
communications 

Real Estate Activities 

Financial 
Intermediation 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

BE 

BG 

CZ 

DK 

DE 

EE 

EL 

ES 

FR 

IE 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NE 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

30,612 

4,001 

15,481 

26,112 

219,804 

1,694 

24,813 

72,315 

175,004 

10,831 

133,938 

1,422 

2,340 

3,805 

3,281 

11,630 

541 

46,146 

26,349 

35,241 

16,892 

21,789 

3,319 

7,573 

19,465 

38,067 

149,809 

45% 

36% 

45% 

45% 

41% 

37% 

29% 

35% 

40% 

46% 

32% 

43% 

33% 

26% 

65% 

38% 

30% 

59% 

37% 

38% 

32% 

44% 

33% 

33% 

49% 

48% 

36% 

48 

0 

21 

53 

803 

6 

2 

153 

275 

37 

177 

1 

1 

0 

6 

5 

1 

1,299 

75 

16 

63 

66 

4 

14 

0 

0 

438 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

3% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

976 

323 

1,509 

1,509 

6,562 

10 

338 

2,166 

2,491 

256 

347 

28 

201 

134 

48 

604 

0 

3,864 

1,585 

2,363 

133 

916 

79 

110 

1,627 

3,808 

3,396 

3% 

8% 

10% 

6% 

3% 

1% 

1% 

3% 

1% 

2% 

0% 

2% 

9% 

4% 

1% 

5% 

0% 

8% 

6% 

7% 

1% 

4% 

2% 

1% 

8% 

10% 

2% 

1,489 

82 

693 

621 

9,733 

32 

508 

1,696 

5,209 

487 

3,123 

24 

34 

57 

684 

344 

19 

2,214 

1,014 

1,093 

615 

310 

80 

151 

479 

947 

8,973 

5% 

2% 

4% 

2% 

4% 

2% 

2% 

2% 

3% 

5% 

2% 

2% 

1% 

1% 

21% 

3% 

4% 

5% 

4% 

3% 

4% 

1% 

2% 

2% 

2% 

2% 

6% 

Mean 
4% 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

40% 

0% 

4% 

and own calculations. 

VTTL=VAT Total Tax Liability 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
62 

Table  8:  Baseline  VAT  Liability  for  main  exempt  sectors  and  activities  (continued  from 
Table 7) 

Public Admin and 
Defence; Compulsory 
Social Security 

Education 

Health and Social 
Work 

Other Community, 
Social and Personal 
Services 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

BE 

BG 

CZ 

DK 

DE 

EE 

EL 

ES 

FR 

IE 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NE 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

1,303 

170 

555 

1,403 

8,897 

99 

1,260 

3,335 

5,822 

403 

5,170 

54 

103 

69 

96 

442 

23 

4% 

4% 

4% 

5% 

4% 

6% 

5% 

5% 

3% 

4% 

4% 

4% 

4% 

2% 

3% 

4% 

4% 

4,645 

10% 

974 

958 

658 

280 

128 

417 

1,192 

2,114 

9,410 

4% 

3% 

4% 

1% 

4% 

6% 

6% 

6% 

6% 

312 

58 

252 

536 

2,479 

41 

135 

644 

1,488 

217 

486 

9 

37 

45 

19 

170 

3 

648 

348 

406 

179 

188 

60 

95 

354 

623 

2,883 

1% 

1% 

2% 

2% 

1% 

2% 

1% 

1% 

1% 

2% 

0% 

1% 

2% 

1% 

1% 

1% 

1% 

1% 

1% 

1% 

1% 

1% 

2% 

1% 

2% 

2% 

2% 

1,678 

117 

614 

1,825 

8,993 

54 

803 

3,061 

4,509 

727 

5,054 

24 

54 

105 

85 

342 

11 

1,945 

1,091 

737 

767 

705 

121 

212 

890 

1,661 

10,662 

5% 

3% 

4% 

7% 

4% 

3% 

3% 

4% 

3% 

7% 

4% 

2% 

2% 

3% 

3% 

3% 

2% 

4% 

4% 

2% 

5% 

3% 

4% 

3% 

5% 

4% 

7% 

419 

67 

162 

299 

1,428 

34 

252 

1,550 

5,331 

181 

513 

8 

35 

27 

6 

57 

34 

409 

331 

696 

434 

0 

33 

135 

337 

941 

1,066 

1% 

2% 

1% 

1% 

1% 

2% 

1% 

2% 

3% 

2% 

0% 

1% 

1% 

1% 

0% 

0% 

6% 

1% 

1% 

2% 

3% 

0% 

1% 

2% 

2% 

2% 

1% 

Mean 
1% 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

4% 

1% 

4% 

and own calculations. 

VTTL=VAT Total Tax Liability  

TAXUD/2012/DE/323 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
63 

Table  9:  Baseline  VAT  Liability  for  main  exempt  sectors  and  activities  (continued  from 
Table 8) 

Other IC 

Government final 
consumption 

NPISH final 
consumption 

GFCF of exempt 
sectors 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

Baseline 
VTTL 

% of 
Total 
VVTL 

564 

0 

0 

713 

0 

0 

0 

0 

0 

277 

421 

0 

0 

0 

0 

0 

0 

0 

0 

0 

495 

0 

0 

0 

0 

0 

0 

2% 

0% 

0% 

3% 

0% 

0% 

0% 

0% 

0% 

3% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

3% 

0% 

0% 

0% 

0% 

0% 

0% 

1,266 

83 

827 

943 

7,823 

66 

82 

2,946 

9,591 

287 

7,926 

4 

26 

93 

49 

745 

33 

2,160 

762 

1,137 

311 

731 

125 

285 

850 

1,658 

1,775 

4% 

2% 

5% 

4% 

4% 

4% 

0% 

4% 

5% 

3% 

6% 

0% 

1% 

2% 

1% 

6% 

6% 

5% 

3% 

3% 

2% 

3% 

4% 

4% 

4% 

4% 

1% 

58 

4 

151 

0 

1,535 

11 

40 

102 

861 

131 

207 

1 

1 

0 

7 

186 

2 

133 

45 

126 

105 

259 

6 

7 

97 

0 

1,745 

0% 

0% 

1% 

0% 

1% 

1% 

0% 

0% 

0% 

1% 

0% 

0% 

0% 

0% 

0% 

2% 

0% 

0% 

0% 

0% 

1% 

1% 

0% 

0% 

1% 

0% 

1% 

5,655 

533 

2,124 

3,919 

42,048 

282 

3,740 

9,828 

34,955 

1,952 

19,909 

455 

280 

457 

1,147 

1,520 

39 

9,908 

3,491 

5,718 

1,669 

6,127 

446 

1,087 

3,628 

6,702 

14,069 

18% 

13% 

14% 

15% 

19% 

17% 

15% 

14% 

20% 

18% 

15% 

32% 

12% 

12% 

35% 

13% 

7% 

21% 

13% 

16% 

10% 

28% 

13% 

14% 

19% 

18% 

9% 

BE 

BG 

CZ 

DK 

DE 

EE 

EL 

ES 

FR 

IE 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NE 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

17% 
Mean 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

0% 

3% 

0% 

and own calculations. 

VTTL=VAT Total Tax Liability 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
64 

While scenario 1 abolishes all zero and reduced rates, in scenario 2, zero and reduced 
rates are abolished, and the standard rate is changed to a new value, without affecting 
total VAT liabilities  of  all  institutional  sectors.  Table  10  and  Figure  1 show  this  new 
standard  rate  and  compare  it  to  the  standard  rate  in  2011.  In  the  EU-27  average,  the 
revenue neutral rate would be 3 percentage points lower than the average standard rate. 
It  is,  however,  apparent that  the  exercise  would  have  very  different  consequences  for 
individual countries.61 The required reduction in the standard rate ensuring a revenue-
neutral outcome depends on the pervasiveness of the zero and reduced rates in the VAT 
rates  system  in  place  in 2011.  Thus,  Poland,  Portugal,  Ireland,  Spain  and  Italy  would 
see a reduction in the standard rate of more than five percentage points. On the other 
hand, for countries such as Bulgaria, Slovakia, Denmark and Lithuania (which rely less 
on  zero and reduced rates)  the  actual  standard  rate  in  2011 and the  “revenue  neutral” 
rate are virtually identical. 

In  the  following  two  sections  we  analyse  the  situation  for  the  different  institutional 
sectors paying VAT (households in section 2.3, non-household entities in section 2.4) in 
2011 in more detail, and perform our analysis for scenario 1 and scenario 2. Section 2.5 
analyses  the  estimated  additional  revenues  generated  in  reform  scenarios  1  and  3 
(compensating low income households for their additional VAT payments in scenario 
1). All these tasks are performed statically, without behavioural reactions to changes in 
the VAT rates structure. Chapter 3 analyses the general equilibrium effects of a change 
in the VAT rates structure on GDP growth, employment, consumption, and import and 
export volumes, allowing for behavioural reactions. 

61 Note that this is the arithmetic average of the budget-neutral rate of all EU-27 countries, not the EU-27 
average. Thus, introducing a new standard rate of 17.7 % in all EU-27 Member States while abolishing 
all zero and reduced rates would not be a budget neutral reform. 

TAXUD/2012/DE/323 

 
                                                      
Table 10: Standard and revenue neutral rates 

65 

Country 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Average 

Standard 
rate 

Revenue 
neutral 
rate 

21.0% 
20.0% 
20.0% 
25.0% 
19.0% 
20.0% 
23.0% 
18.0% 
20.0% 
21.0% 
20.3% 
15.0% 
22.0% 
21.0% 
15.0% 
25.0% 
18.0% 
19.0% 
20.0% 
23.0% 
23.0% 
24.0% 
20.0% 
20.0% 
23.0% 
25.0% 
20.0% 
20.7% 

16.9% 
20.0% 
17.5% 
24.7% 
16.8% 
19.4% 
18.9% 
12.6% 
16.1% 
15.2% 
15.1% 
12.1% 
20.7% 
20.6% 
12.5% 
22.1% 
13.5% 
16.1% 
16.8% 
17.0% 
17.2% 
22.9% 
16.3% 
19.8% 
20.2% 
21.6% 
16.3% 
17.7% 

Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

and own calculations. 

Note: The revenue neutral rate is the standard rate that keeps revenues from all institutional sectors constant 

when zero and reduced rates are abolished. The standard rates depict the situation in 2011. 

Study on VAT rates structure 

 
66 

Figure 1: Standard and revenue neutral rates 

Source: Table 10 
Note: The revenue neutral rate is the standard rate that keeps revenues from all institutional sectors constant 

when zero and reduced rates are abolished. 

2.3  Results: VAT paid by private households  

This section analyses in detail the effects of the current VAT rates structure on private 
households.  As  explained  in  section  2.1,  we  use  aggregate  data  from  national 
Household  Budget  Surveys  (HBS)  as  provided  by  Eurostat.62  We  calculate  VAT 
liability on private household consumption expenditures in 2011, as well as in reform 
scenarios 1 and 2. We calculate total VAT liabilities for the average household as well 
as broken down by COICOP categories and household characteristics. In addition to the 
VAT payments of the average household, the focus of this chapter is on the breakdown 
of VAT payments  by income quintile. As summarised in section 1.2, equity concerns 
are  an  important  argument  in  favour  of  reduced  rates.  Therefore,  it  is  interesting  to 
know  how  the  present  and  proposed  VAT  rates  structures  affect  different  income 

62 Section A.3 in the Annex contains a validation exercise comparing the results calculated on aggregate 
data  with  results  calculated  from  micro  data  for  three  countries.  In  addition,  we  compare  the  results 
obtained in this study with results in IFS et al. (2011). 

TAXUD/2012/DE/323 

0%5%10%15%20%25%DKROHUSELVLTFIBGSKEEELCZPTPLBEATDESIUKFRNLIEITMTESLUCYStandard rateRevenue neutral rate 
                                                      
67 

groups.  Further  breakdowns  (by  number  of  active  household  members  and  household 
types) can be found in the Addendum containing the country analyses. All breakdowns 
specified in section 2.1 can be found in the tables provided in the spread sheets. 

Table  11 contains the standard VAT rate as of 2011  for each  Member State (EU-27), 
the average VAT rate as calculated  using the expenditure structure in HBS data63 and 
the  average VAT  rates for  the  two  reform  scenarios.  The  deviation from  the  standard 
rate  to  the  average  VAT  rate  faced  by  private  households  (given  their  average 
consumption patterns)  is caused  by  reduced,  super  reduced,  parking  and  zero  rates  as 
well as exemptions.  

The  abolition  of  zero  and reduced rates (scenario 1) yields  higher  average  VAT rates 
for all countries. However, the size of this increase varies considerably. Poland, Malta, 
Portugal, Ireland, Italy and France face increases of more than 4 percentage points; the 
highest increase occurs in Poland (6.3 percentage points). An increase of more than 3 
percentage  points  occurs  in  several  other  countries  (Austria,  Spain,  the  UK, 
Luxembourg, Belgium, Greece, the Netherlands, the Czech Republic and Slovenia). At 
the  other  end  of  the  scale,  some  countries  experience  almost  no  increase:  Bulgaria, 
Denmark, Slovakia and Estonia experience increases of less than 0.5 percentage points.  

Scenario  2  uses  the  new  standard  rate  calculated  using  WIOD  data,  taking  all 
institutional  sectors  into  account. This new  standard rate is  not  automatically  revenue 
neutral  for  households.  That  is,  the  new,  budget  neutral  standard  rate  taking  all 
institutional sectors into account can increase the VAT burden of all private households 
(when  this  is  the  case,  of  course,  the  VAT  burden  of  at  least  one  other  institutional 
sector  has  to  decrease).  When  we  simulate  the  effect  of  this  new  rate  on  private 
households using HBS data, we see that in fact in almost all countries, the average VAT 
rate that households face, increases. Only Hungary (-1.0 percentage point), Latvia (-0.5 
percentage  points)  and  Denmark  (-0.1  percentage  points)  experience  decreases.  In 
Estonia  there  is  no  change.  France,  Luxembourg,  Poland,  Portugal,  the  UK,  the 
Netherlands, Malta and the Czech Republic face increases in their average VAT rates of 
more than 1 percentage point.64 

63 For a short discussion on differences to the effective VAT rates obtained from WIOD data in Table 5 and 

Table 6, please refer to section 2.1. 

64  We  already  mentioned  that  the  average  VAT  rate  in  2011  is  different  when  calculated  using  HBS  or 
WIOD data. This is also the case in the other scenarios, leading to different effects of the “neutral” rate in 
scenario 2 (see section 2.1).  

Study on VAT rates structure 

 
 
 
 
                                                      
68 

Table 11: Average VAT rates of private households of EU Member States in 2011 

Country 

Standard 
rate 

2011 

Scenario 1 

Scenario 2 

Average VAT rates 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
*  The  standard  rate  in  Italy  increased  from  20 %  to 21 %  in  September  2011;  hence,  we  use  a  weighted 

  %p change 
+3.5%p 
+0.1%p 
+3.2%p 
+0.1%p 
+1.9%p 
+0.5%p 
+3.4%p 
+3.7%p 
+4.3%p 
+4.6%p 
+4.3%p 
+2.7%p 
+0.7%p 
+0.7%p 
+3.5%p 
+1.5%p 
+5.4%p 
+3.2%p 
+3.7%p 
+6.3%p 
+5.4%p 
+1.1%p 
+3.1%p 
+0.4%p 
+2.8%p 
+2.9%p 
+3.6%p 

  %p change 
+0.7%p 
+0.1%p 
+1.1%p 
-0.1%p 
+0.4%p 
+0.0%p 
+0.5%p 
+0.3%p 
+1.9%p 
+0.6%p 
+0.8%p 
+0.8%p 
-0.5%p 
+0.4%p 
+1.8%p 
-1.0%p 
+1.2%p 
+1.4%p 
+1.0%p 
+1.5%p 
+1.5%p 
+0.1%p 
+0.4%p 
+0.2%p 
+1.0%p 
+0.7%p 
+1.4%p 

11.1% 
14.8% 
13.8% 
15.4% 
10.1% 
14.5% 
13.0% 
7.7% 
9.0% 
9.7% 
9.3% 
7.2% 
18.1% 
17.2% 
6.6% 
21.2% 
11.2% 
8.3% 
12.8% 
11.9% 
9.9% 
21.7% 
11.7% 
15.8% 
12.3% 
13.3% 
8.7% 

14.6% 
14.9% 
17.0% 
15.5% 
12.0% 
15.0% 
16.4% 
11.4% 
13.3% 
14.3% 
13.6% 
9.9% 
18.8% 
17.9% 
10.1% 
22.7% 
16.6% 
11.5% 
16.5% 
18.2% 
15.3% 
22.8% 
14.8% 
16.2% 
15.1% 
16.2% 
12.3% 

21.0% 
20.0% 
20.0% 
25.0% 
19.0% 
20.0% 
23.0% 
18.0% 
19.6% 
21.0% 
20.3% 
15.0% 
22.0% 
21.0% 
12.0% 
25.0% 
18.0% 
19.0% 
20.0% 
23.0% 
23.0% 
24.0% 
20.0% 
20.0% 
23.0% 
25.0% 
20.0% 

11.8% 
14.9% 
14.9% 
15.3% 
10.5% 
14.5% 
13.5% 
8.0% 
10.9% 
10.3% 
10.1% 
8.0% 
17.6% 
17.6% 
8.4% 
20.2% 
12.4% 
9.7% 
13.8% 
13.4% 
11.4% 
21.8% 
12.1% 
16.0% 
13.3% 
14.0% 
10.1% 

average of both rates.  

Table  12  shows  the  average  VAT  bills  of  private  households  in  the  EU-27  Member 
States as a proportion of total household expenditures and in Euros per year. In contrast 
to the average VAT rate that is calculated relative to net expenditures, the average VAT 
bill is calculated as a fraction of gross expenditures. We can see that the VAT bill as a 

TAXUD/2012/DE/323 

 
 
 
 
69 

percentage of total expenditure ranges from about 6.2 % to 17.8 %, with Luxembourg, 
Cyprus and Spain being on the lower and Romania, Hungary, and Latvia on the upper 
end  of  the  spectrum.  In  absolute  terms,  Danish  households  face  the  highest  average 
VAT  bill  of  over  € 5,000  per  year,  followed  by  countries  with  comparatively  low 
average  VAT  rates  but  high  expenditure  levels  (Sweden,  Finland,  Austria  and 
Luxembourg). Households in countries with comparatively low expenditures (Bulgaria, 
Romania  and  Poland)  face  the  lowest VAT  bills  in  absolute  terms  (although  Bulgaria 
and Romania have very high average VAT rates).65 

Looking at the development of average VAT rates in  Table 11, it is hardly surprising 
that the average increase of the VAT bill as a fraction of expenditure in scenario 1 is 
highest  for  Poland  (+4.8  percentage  points),  Portugal  (+4.3)  and  Malta  (+4.2)  and 
lowest for Bulgaria (+0.1), Denmark (+0.1), Slovakia (+0.3) and Estonia (+0.3). With 
respect  to  absolute  increases,  Luxembourg  ranks  first  (plus  € 2,000),  followed  by 
Ireland  and  France.  This  is  because  these  countries  face  a  large  increase  in  average 
VAT rates, and have comparably high average consumption expenditures. In Portugal, 
Poland and Luxembourg, average VAT payments increase by more than 50 %. 

Scenario 2 has much smaller effects, although they are not zero for private households 
in  most  countries.  VAT  bill  increases  in  absolute  terms  are  again  highest  in 
Luxembourg  (in  excess  of  € 1,000),  followed  by  France  and  the  Netherlands.  In 
Luxembourg, this increase is 27 % compared to pre-reform VAT payments, in France 
21 %.  On  the  other  end  of  the  spectrum,  Hungary,  Latvia  and  Denmark  experience 
slight decreases in their VAT payments.  

65 This ranking remains the same when we adjust average expenditures by the average household size in 

each country. 

Study on VAT rates structure 

 
 
                                                      
70 

Table 12: Average VAT bills of private households of EU  Member States as a proportion 
of total household expenditure and in € per year66 

VAT bill in € 

Country 

VAT bill (in % of expenditure) 
2011 

2011 

10.0% 
12.9% 
12.1% 
13.3% 
9.2% 
12.7% 
11.5% 
7.2% 
8.3% 
8.9% 
8.6% 
6.8% 
15.3% 
14.7% 
6.2% 
17.5% 
10.0% 
7.7% 
11.4% 
10.6% 
9.0% 
17.8% 
10.5% 
13.7% 
11.0% 
11.7% 
8.0% 

Scenario 1  Scenario 2 
+0.5%p 
+0.1%p 
+0.8%p 
-0.0%p 
+0.5%p 
-0.0%p 
+0.4%p 
+0.2%p 
+1.6%p 
+0.5%p 
+0.5%p 
+0.7%p 
-0.3%p 
+0.3%p 
+1.5%p 
-0.7%p 
+1.0%p 
+1.2%p 
+0.8%p 
+1.3%p 
+1.3%p 
+0.1%p 
+0.3%p 
+0.2%p 
+0.7%p 
+0.6%p 
+1.2%p 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny, 7.451 Danish kroner, 0.706 Latvian 
lats,  3.453  Lithuanian  litai,  279.370  Hungarian  forints,  4.121  Polish  zloty,  4.212  Romanian  lei,  9.030 
Swedish kronor and 0.868 British pounds to 1 Euro. 

Scenario 1  Scenario 2 
+207 
+3 
+98 
-20 
+180 
-0 
+135 
+70 
+586 
+232 
+184 
+261 
-41 
+28 
+1,031 
-61 
+261 
+422 
+324 
+132 
+289 
+4 
+83 
+20 
+314 
+236 
+420 

+2.7%p 
+0.1%p 
+2.4%p 
+0.1%p 
+1.7%p 
+0.3%p 
+2.6%p 
+3.1%p 
+3.5%p 
+3.6%p 
+3.3%p 
+2.3%p 
+0.5%p 
+0.5%p 
+2.9%p 
+1.1%p 
+4.2%p 
+2.6%p 
+2.8%p 
+4.8%p 
+4.3%p 
+0.8%p 
+2.5%p 
+0.3%p 
+2.1%p 
+2.2%p 
+3.0%p 

+1,156 
+3 
+294 
+41 
+631 
+35 
+925 
+920 
+1,311 
+1,726 
+1,170 
+903 
+57 
+53 
+2,006 
+96 
+1,122 
+957 
+1,164 
+528 
+1,002 
+45 
+656 
+37 
+926 
+958 
+1,108 

3,735 
639 
1,275 
5,035 
3,078 
1,139 
3,521 
1,914 
2,767 
3,684 
2,682 
2,417 
1,595 
1,275 
3,841 
1,303 
2,321 
2,548 
4,089 
988 
1,827 
853 
2,426 
1,591 
4,105 
4,355 
2,609 

66  The  second  guiding  principle  of  the  European  Commission’s  current  assessment  of  the  VAT  rates 
structure  states  that  reduced  rates  on  goods  and  services  “for  which  the  consumption  is  discouraged  by 
other EU policies” should be abolished. Further, it states that “this could notably be the case for goods and 
services  harmful  to  the  environment,  health  and  welfare”  (European  Commission  2011b,  p.  11).  We 
provide an estimate of the likely effect of an abolition of VAT reductions for those supplies that have been 
identified  to  fit  this  description  –  Water,  Energy  products,  Street  cleaning,  refuse  collection  and  waste 
treatment, and Housing – in the EU-27 countries in Table 47 in the Annex. In the EU-27 average, the VAT 
bill  of  a  private  household  would  increase  by  € 64;  the  UK  and  France  would  see  the  biggest  increases 
(€ 242  and  € 210  respectively),  while  Bulgaria,  Estonia,  Latvia,  Lithuania,  Hungary,  Romania,  Slovakia, 
Finland  and  Sweden  would  not  see  any  increases.  Note  that  this  only  includes  households,  while  most 
businesses can deduct VAT paid on their inputs, so they would not be affected by such a reform.  

TAXUD/2012/DE/323 

                                                      
71 

Goods and services categories  

As can be seen more clearly in the country analyses in the Addendum, VAT payments 
in 2011 differ considerably among the 12 main COICOP categories. The extent of this 
depends on the expenditure share for each category of goods and services as well as on 
the average VAT rate. Table 13 shows the categories with the highest  VAT payments 
and their share of total VAT payments for all EU-27 countries. In 16 of 27 countries, 
CP07  “Transport”  is  the  category  to  which  most  VAT  payments  relate.  Within  this 
group of countries, the share of payments relating to supplies in CP07 as a share of total 
VAT payments ranges from 33 % in Luxembourg to 20 % in Spain. The category can 
be  further  disaggregated  into the subcategories  CP071  “Purchase  of  vehicles”, CP072 
“Operation  of  personal  transport  equipment”  and  CP073  “Transport  services”.  In  all 
countries  most  VAT  is  paid  on  one  of  the  first  two  subcategories,  purchase  and 
operation  of  a  car.  This  is  because  expenditures  on  these  categories  are  high  and  the 
average  VAT  rate  is  almost  the  standard  rate  on  all  goods  and  services  in  these  two 
subcategories.67 Transport services, on the other hand, only account for a small share of 
expenditures. In addition, public transport services are not taxed at the standard rate in 
many Member States.  

In  the  remaining  nine  Member  States,  CP01 “Food and  non-alcoholic  beverages” and 
CP04 “Housing, water, electricity, gas and other fuels” rank first. Whether or not VAT 
payments on CP01 are high depends almost entirely on the VAT rates structure of the 
country: Expenditures on this category are high in all Member States, however, in only 
seven countries all supplies within the category are taxed at the standard rate. Among 
these are Bulgaria, Denmark, Estonia, Latvia, Lithuania, Romania and Slovakia. Thus, 
only in Greece the average share of VAT payments is highest for CP01, although the 
category is not taxed at the standard rate. The importance of expenditures on  CP04 is 
driven  by  the  importance  of  this  category  in  the  household  budgets.  Apart  from  two 
exceptions  (Hungary  and  Romania)  the  average  VAT  rate  on  expenditures  in  this 
category is normally well below the standard rate. Actual rents for private households 
are  exempt  in  most  countries,  the  notional  consumption  expenditures  on  owner-
occupied dwellings (imputed rents) are treated as exempt supplies, and some additional 
expenditures in this category are subject to reduced rates in some countries. 68  

67 In some Member States minor repair services are taxed at a reduced rate.  
68 The HBS for the Czech Republic, Hungary, Malta and Romania do not contain information on imputed 
rents. In addition, in Hungary and Romania actual rents are taxed at the standard rate. Thus, the average 
VAT rate on CP04 according to HBS data is equal to the standard rate in these two countries. 

Study on VAT rates structure 

 
                                                      
72 

Table  13:  Categories  with  the  highest  VAT  expenditure,  their  share  and  their  combined 
share of total VAT expenditure for EU Member States, 2011 

Most Important Categories 
3rd 
2nd 
1st 
CP04 
CP12 
CP07 
CP02 
CP04 
CP01 
CP07 
CP01 
CP04 
CP07 
CP04 
CP01 
CP09 
CP04 
CP07 
CP07 
CP04 
CP01 
CP07 
CP04 
CP01 
CP03 
CP01 
CP07 
CP03 
CP05 
CP07 
CP04 
CP09 
CP07 
CP03 
CP01 
CP07 
CP01 
CP03 
CP07 
CP04 
CP07 
CP01 
CP07 
CP04 
CP01 
CP03 
CP05 
CP07 
CP07 
CP01 
CP04 
CP04 
CP05 
CP07 
CP04 
CP09 
CP07 
CP09 
CP04 
CP07 
CP01 
CP07 
CP04 
CP01 
CP11 
CP07 
CP08 
CP04 
CP01 
CP01 
CP04 
CP07 
CP07 
CP04 
CP01 
CP01 
CP12 
CP07 
CP04 
CP09 
CP07 
CP11 
CP09 
CP07 

Country 
BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 

Share of VAT 
3rd 
2nd 
12% 
12% 
10% 
14% 
13% 
15% 
17% 
18% 
13% 
16% 
14% 
17% 
15% 
15% 
13% 
14% 
12% 
12% 
12% 
13% 
12% 
15% 
11% 
14% 
14% 
14% 
9% 
15% 
12% 
13% 
13% 
25% 
12% 
14% 
14% 
17% 
13% 
16% 
13% 
14% 
10% 
14% 
12% 
16% 
12% 
14% 
9% 
24% 
13% 
15% 
12% 
16% 
16% 
16% 

1st 
22% 
36% 
22% 
18% 
22% 
31% 
15% 
20% 
25% 
21% 
21% 
21% 
31% 
39% 
33% 
26% 
22% 
22% 
24% 
27% 
21% 
40% 
24% 
29% 
22% 
21% 
23% 

Sum 
46% 
60% 
50% 
54% 
51% 
62% 
46% 
47% 
48% 
46% 
48% 
46% 
60% 
62% 
58% 
65% 
49% 
53% 
52% 
54% 
45% 
68% 
51% 
61% 
51% 
49% 
54% 

In addition to these three categories, CP09 “Recreation and culture” (Germany, Ireland, 
the  Netherlands,  Austria,  Sweden  and  the  United  Kingdom),  CP03  “Clothing  and 
footwear”  (Spain,  France,  Italy,  Cyprus  and  Luxembourg),  CP05  “Furnishings, 
household  equipment  and  routine  maintenance  of  the  house”  (France,  Luxembourg, 
Malta),  CP11  “Restaurants  and  hotels”  (Portugal  and  the  United  Kingdom),  CP12 
“miscellaneous  goods  and  services”  (Belgium  and  Finland)  and  CP02  “Alcoholic 

TAXUD/2012/DE/323 

  
 
73 

beverages, tobacco and narcotics” (Bulgaria) and CP08 “Communications” (Romania) 
appear  among  the  top  three.  We  can  see  that,  on  EU-27  average  the  three  most 
important  expenditure  categories  taken  together  account  for  more  than  50 %  of  total 
expenditure, in Romania they account for nearly 70 % of total expenditure. It is worth 
noting that Romania and Bulgaria are the only countries without CP07 in the three most 
important categories.69 

Income Distribution 

Table  14  to  Table  18  show  average  VAT  payments,  both  as  a  fraction  of  total 
household  expenditure  and  in  absolute  terms,  by  income  quintile70,  for  all  Member 
States (EU-27). Comparing average VAT payments for the 20 % of households with the 
lowest income (first quintile) and the 20 % of households with the highest income (fifth 
quintile), we see that in all countries, richer households paid more VAT in 2011 than 
poorer  households.  The  gap  is  largest  in  Luxembourg,  where  the  fifth  quintile  on 
average  pays  more  than  seven  times  as  much  VAT  as  the  first  quintile,  followed  by 
Portugal and Italy (5.2 and 5.1, respectively). The gap is lowest in the Czech Republic, 
Austria and the Netherlands (1.4, 1.7 and 2.1, respectively).  

A country’s VAT rates structure can be described as either proportional, regressive or 
progressive,  depending  on  the  importance  of  VAT  payments  in  relation  to  total 
expenditure.  Broadly  speaking:  A  tax  is  progressive  if  it  puts  more  burden  on  richer 
households  (relative  to  their  expenditure);  a  regressive  tax  over-proportionally  affects 
the poor, while a proportional tax affects each income group similarly. We define these 
terms  loosely  by  restricting  our  attention  to  the  first  and  fifth  quintile71.  Only  one 
country  (Hungary)  had  a  regressive  VAT  system  in  2011;  the  gap  between  VAT 
payments of the first and the last income quintile as a proportion of average expenditure 
was  1.5  percentage  points.72  In  11  countries  (Spain,  Romania,  Bulgaria,  Lithuania, 

69  Results  on  how  this  ranking  changes  when  zero  and  reduced  rates  are  abolished  are  found  in  the 

Addendum containing the more detailed analyses for each Member State. 

70 For a definition of income quintiles refer to section 2.1. 
71 proportional: VAT as a fraction of total expenditure differs by less than 0.5 percentage points between 

the first and the fifth quintile 

regressive: VAT  as a  fraction of total expenditure in the first quintile is more than 0.5 percentage points 

higher than in the fifth quintile 

progressive: VAT as a fraction of total expenditure in the fifth quintile is more than 0.5 percentage points 

higher than in the first quintile 

72 Recall that the data for Hungary do not contain information on imputed rents, which might distort the 
picture as typically richer households face higher notional consumption expenditures on owner-occupied 
dwellings. 

Study on VAT rates structure 

 
                                                      
74 

Slovakia,  Estonia,  Greece,  Austria,  the  Czech  Republic,  Cyprus  and  Latvia)  we  find 
that the VAT system affects households proportionally across income quintiles. In the 
15 remaining EU-27 countries, VAT payments as a fraction of expenditures are more 
than  0.5  percentage  points  higher  for  the  richest  households  than  for  the  poorest 
households;  we  therefore  define  these  VAT  systems  to  be  progressive.  Among  these, 
the United Kingdom shows the largest gap (2.6), followed by Luxembourg (2.4), Italy 
and Belgium (2.3) and Poland (2.2).  

Abolishing all zero and reduced rates – scenario 1 – affects income groups differently 
depending  on  the  country.  In  thirteen  countries  (Romania,  Lithuania,  Bulgaria, 
Denmark, the Netherlands, Estonia, Slovakia, Latvia, France, Austria, Hungary, Finland 
and  Sweden)  the  increase  in  VAT  as  a  proportion  of  expenditure  is  similar  over  all 
quintiles  (the  lowest  quintile  faces  an  increase  in  VAT  per  expenditure  under  0.5 
percentage points more than the highest quintile).73 In the remaining 14 countries, there 
are  differences  of  more  than  0.5  percentage  points  between  the  poorest  and  richest 
households: the  gap  is  highest in Malta (2.4  percentage  points),  followed  by  Portugal 
and  Poland (1.5),  Ireland (1.2)  and  Italy (1.1).  Relative  to  their  expenditures,  low-
income  households  in  these  14  Member  States  suffer  more  from  an  abolition  of  zero 
and reduced rates. Regarding absolute values, however, higher income households face 
higher  increases  in  their  average  VAT  bills  in  all  countries.  Households  in  the  fifth 
quintile  in  Luxembourg,  Ireland,  France  and  Italy  are  faced  with  the  highest  absolute 
increases (€ 3.473, € 2.216, € 1.851 and € 1.695, respectively). The gap in the increase 
borne  by  the  fifth  and  the  first  quintile  is  greatest  in  Luxembourg,  where  the  fifth 
quintile  experiences  an  increase  3.5  as  big  as  the  first  quintile,  followed  by 
Portugal (3.3) and Italy (2.8).74 On the other side of the spectrum we can find the Czech 
Republic (1.0),  Austria (1.5)  and  Spain (1.6).  That  is,  high  income  households  in 
Luxembourg benefit 3.5 as much in absolute terms from zero and reduced rates as low 
income households.  Coming back  to our definitions of the VAT rates systems we see 
that  scenario  1  transforms  the  VAT  rates  systems  of  Spain,  Cyprus  and  Greece  from 
being proportional to regressive75, while the systems of Portugal, Malta, Germany and 
Ireland  change  from  being  progressive  to  proportional.  Thus,  scenario  1  hits  lower-

73 Recall that there are almost no reform effects in 4 countries (Bulgaria, Denmark, Estonia and Slovakia). 
74 Actually the gap is greatest in Bulgaria, where the fifth quintile experiences an increase 7.2 times as big 
as  the  first  quintile,  followed  by  Romania (4.0).  Also  in  Denmark,  Lithuania  and  Estonia  we  find  a 
comparably  high  gap.  However,  as  the  absolute  changes  households  experience  in  these  countries  are 
rather small, we omit these results. 

75 Our validation exercise comparing the analysis performed based on aggregate data with the one based on 
micro data put Austria into this group of countries as well. As discussed in section A.3, we suspect there 
to be an error in the aggregate data for Austria in the break down by income quintiles. 

TAXUD/2012/DE/323 

 
                                                      
income  households  harder  when  we  look  at  VAT  payments  as  a  fraction  of  total 
expenditure  in  most  countries;  in  absolute  terms,  however,  it  is  higher-income 
households who suffer more. That is, in absolute terms, high-income households benefit 
more from the zero and reduced rates that are in place at the moment than low-income 
households. 

75 

Scenario 2 yields much smaller effects (as a fraction of expenditure, the changes range 
from  -0.7  to  1.6  percentage  points)  than  scenario  1  (0.1  to  4.8  percentage  points). 
However, we see very different results  with respect to the effects on different income 
groups:  
 

In  Belgium,  Denmark,  Germany,  Estonia,  Ireland,  Italy,  Cyprus,  Latvia,  the 
Netherlands,  Austria,  Poland,  Slovenia,  Slovakia,  Sweden  and  the  UK  there  is no 
continuous pattern in absolute changes in VAT payments over the quintiles. In most 
of  these  countries  increases  in  absolute  payments  increase  from  low  to  middle 
income groups, and then decrease again for the highest income group.  
In five countries (the Czech Republic, Greece, Spain, Hungary, Malta) changes in 
absolute  VAT  payments  decrease  with  income,  that  is,  in  absolute  terms,  lower 
income  households  lose  more  due  to  the  reform.  In  Greece  and  Spain  the  higher 
income  groups  even  gain  from  the  reform,  while  lower  income  groups  face 
increases in their VAT payments. In Hungary the average household gains from the 
reform  according  to  HBS  data.  Here  the  absolute  gain  is  higher  for  high  income 
households. 
In  the  remaining  seven  countries  (Bulgaria,  France,  Lithuania,  Luxembourg, 
Portugal, Romania and Finland) increases in absolute VAT payments increase with 
income.76 

 

 

As  for  the  change  in  VAT  payments  relative  to  expenditures,  we  find  that  in  16 
countries it is higher for lower incomes77 and decreasing with income. The gap between 
the  first  and  fifth  quintile  is  highest  for  Malta  (2.3  percentage  points),  followed  by 
Poland  (1.6)  and  Portugal  (1.4).  In  the  remaining  countries  there  is  either  no  clear 
pattern  or  almost  no  effect.  The  same  countries  as  in  scenario  1  change  from 
proportional  to  regressive  (Spain,  Cyprus  and  Greece)  and  from  progressive  to 
proportional (Portugal, Malta, Germany, Ireland).  

76 In Bulgaria, Denmark, Estonia, Romania and Slovakia there are almost no reform effects. 
77 Difference of more than 0.5 percentage points. 

Study on VAT rates structure 

 
 
 
                                                      
76 

Thus, in most countries, scenario 2 is a regressive reform. Higher income households 
spend a higher share of their expenditures on supplies taxed at the standard rate – this 
increases  their  VAT  burden  in  the  base  scenario.  Hence,  in  scenario  2,  they  benefit 
more  from  the  lower  standard  rate  than  lower  income  households.  Households  at  the 
bottom  of  the  income  distribution  suffer from  the  abolition  of  the reduced  rates  to an 
extent that cannot be compensated by the lower standard rate.  

TAXUD/2012/DE/323 

 
77 

Table 14: Average VAT bill of private households as a proportion of total household expenditure and in Euros per year, by 
income quintile in 2011 and reform scenarios 1 and 2, for BE, BG, CZ, DK, DE and EE 

BE 

BG 

CZ 

DK 

DE 

EE 

in € 

1
1
0
2

Income 
Quintiles 
First 
Second 
Third 
Fourth 
Fifth 
  First 
1

342 
490 
604 
729 
1,030 

in € 
2,654 
3,563 
5,043 
6,195 
7,697 

in % 
in € 
13.2% 
2,061 
13.1% 
2,889 
12.6% 
3,567 
12.7% 
4,303 
5,850 
12.9% 
+780  +0.0%p 
+1,003  +0.0%p 
+1,159  +0.1%p 
+1,349  +0.1%p 
+1,487  +0.1%p 
+228  +0.0%p 
+248  +0.0%p 
+242  +0.1%p 
+253  +0.1%p 
+62  +0.1%p 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny and 7.451 Danish kroner to 1 Euro. 

in % 
in € 
12.5% 
1,155 
12.5% 
1,081 
13.0% 
1,109 
13.7% 
1,393 
1,639 
13.9% 
+302  +0.1%p 
+274  +0.1%p 
+274  +0.1%p 
+313  +0.1%p 
+306  +0.1%p 
-0.1%p 
+120 
-0.0%p 
+105 
-0.0%p 
+101 
-0.1%p 
+100 
-0.1%p 
+63 

in % 
12.0% 
12.1% 
12.0% 
12.2% 
12.3% 
+1  +2.7%p 
+2  +2.6%p 
+3  +2.5%p 
+4  +2.3%p 
+6  +2.0%p 
+1  +1.1%p 
+2  +1.0%p 
+3  +1.0%p 
+4  +0.8%p 
+6  +0.4%p 

in % 
8.8% 
9.3% 
9.7% 
10.2% 
11.1% 
+2.9%p 
+2.8%p 
+2.8%p 
+2.8%p 
+2.4%p 
+0.9%p 
+0.7%p 
+0.6%p 
+0.5%p 
+0.1%p 

in % 
7.7% 
8.2% 
8.5% 
8.5% 
8.5% 
+16  +2.3%p 
+38  +2.2%p 
+56  +2.0%p 
+45  +1.8%p 
+51  +1.5%p 
-16  +1.1%p 
-5  +1.0%p 
-5  +0.8%p 
-30  +0.7%p 
-42  +0.4%p 

Second 
Third 
Fourth 
Fifth 
  First 
2

Second 
Third 
Fourth 
Fifth 

o
i
r
a
n
e
c
S

o
i
r
a
n
e
c
S

in % 
in € 
13.0% 
1,315 
12.3% 
2,017 
12.3% 
2,694 
12.6% 
3,335 
4,714 
13.0% 
+430  +0.4%p 
+602  +0.3%p 
+721  +0.4%p 
+803  +0.3%p 
+945  +0.3%p 
+211  +0.0%p 
+270 
-0.0%p 
+291  +0.0%p 
-0.0%p 
+281 
-0.0%p 
+238 

in € 

607 
752 
915 
1,327 
2,090 
+20 
+23 
+30 
+40 
+60 
+1 
-0 
+2 
-1 
-4 

TAXUD/2012/DE/323 

  
 
 
 
 
 
78 

Table 15: Average VAT bill of private households as a proportion of total household expenditure and in Euros per year, by 
income quintile in 2011 and reform scenarios 1 and 2, for EL, ES, FR, IE, IT and CY 78 

EL 

ES 

FR 

IE 

IT 

CY 

Income 
Quintiles 
First 
Second 
Third 
Fourth 
Fifth 
  First 
1

1
1
0
2

in € 

in € 
1,658 
2,409 
3,780 
4,794 
5,763 

933 
1,731 
2,447 
2,931 
4,047 
+481 
+739 
+931 
+1,063 
+1,303 
+208 
+261 
+278 
+291 
+269 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. (For Italy also Italian Household Budget Survey 2005, Italian 

in % 
in € 
7.6% 
1,271 
7.9% 
1,606 
8.3% 
1,903 
8.4% 
2,135 
2,665 
8.6% 
+722  +3.6%p 
+844  +3.5%p 
+909  +3.4%p 
+990  +3.4%p 
+1,132  +3.4%p 
+124  +1.8%p 
+109  +1.7%p 
+65  +1.6%p 
+52  +1.5%p 
-7  +1.5%p 

in % 
in € 
7.8% 
1,654 
8.1% 
2,203 
8.7% 
2,682 
9.1% 
3,156 
4,145 
9.5% 
+879  +4.4%p 
+1,103  +4.0%p 
+1,267  +3.8%p 
+1,462  +3.5%p 
+1,851  +3.2%p 
+427  +1.3%p 
+514  +1.0%p 
+564  +0.7%p 
+641  +0.4%p 
+784  +0.0%p 

in % 
in € 
6.4% 
1,011 
6.7% 
1,891 
6.8% 
2,269 
6.8% 
3,282 
5,140 
6.8% 
+612  +3.0%p 
+934  +2.6%p 
+1,054  +2.4%p 
+1,333  +2.3%p 
+1,695  +2.0%p 
+193  +1.3%p 
+205  +0.9%p 
+197  +0.7%p 
+143  +0.6%p 
-66  +0.4%p 

in % 
7.0% 
7.8% 
8.1% 
8.7% 
9.3% 
+1,065  +3.8%p 
+1,368  +3.4%p 
+1,875  +3.3%p 
+2,125  +3.1%p 
+2,216  +2.7%p 
+313  +1.2%p 
+325  +0.8%p 
+314  +0.6%p 
+214  +0.3%p 
-0.1%p 

in % 
in € 
7.3% 
1,939 
7.2% 
2,387 
7.4% 
2,876 
7.2% 
3,711 
5,148 
6.9% 
+579  +3.7%p 
+665  +3.4%p 
+759  +3.2%p 
+895  +3.0%p 
+1,086  +2.6%p 
+150  +0.7%p 
+122  +0.5%p 
+111  +0.2%p 
+75  +0.2%p 
-0.0%p 
-21 

in % 
10.4% 
10.5% 
10.5% 
10.6% 
10.5% 
+2.7%p 
+2.5%p 
+2.4%p 
+2.2%p 
+1.9%p 
+0.7%p 
+0.5%p 
+0.4%p 
+0.2%p 
-0.0%p 

Second 
Third 
Fourth 
Fifth 
  First 
2

Second 
Third 
Fourth 
Fifth 

o
i
r
a
n
e
c
S

o
i
r
a
n
e
c
S

+12 

EU-SILC 2006, Bank of Italy Survey on Household Income and Wealth 2006, own calculations.) 

78 As the Household Budgets Survey for Italy does not contain information on incomes this result is obtained by matching the HBS 2005 to the EU-
SILC 2006, performed by CAPP. This is meant to give an impression on the proportionality of the Italian VAT rates structure. However, one has 
to  keep  in  mind  the  different  sources  of  information  as  compared  to  the  other  tables.  (More  on  the  comparability  of  results  obtained  from 
aggregated HBS data and micro data matched to the EU-SILC can be found in the annex, section A.3.) 

TAXUD/2012/DE/323 

  
 
 
 
                                                      
79 

Table 16: Average VAT bill of private households as a proportion of total household expenditure and in Euros per year, by 
income quintile in 2011 and reform scenarios 1 and 2, for LV, LT, LU, HU, MT and NL 

LV 

LT 

LU 

HU 

MT 

NL 

in € 

in € 

in € 

1
1
0
2

Income 
Quintiles 
First 
Second 
Third 
Fourth 
Fifth 
  First 
1

868 
1,026 
1,377 
1,851 
2,854 

697 
913 
1,183 
1,490 
2,098 

871 
984 
1,192 
1,393 
1,954 

in % 
15.0% 
14.9% 
14.6% 
14.6% 
14.7% 
+31  +0.4%p 
+47  +0.6%p 
+56  +0.6%p 
+72  +0.5%p 
+79  +0.5%p 
-22  +0.2%p 
-17  +0.3%p 
-29  +0.4%p 
-42  +0.3%p 
-94  +0.2%p 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 0.706 Latvian lats, 3.453 Lithuanian litai and 279.370 Hungarian forints to 1 Euro. 

in % 
in € 
17.9% 
1,156 
17.7% 
1,966 
17.4% 
2,989 
17.1% 
4,459 
8,317 
16.4% 
+980  +1.2%p 
+1,408  +1.2%p 
+1,858  +1.2%p 
+2,318  +1.0%p 
+3,473  +0.9%p 
-0.6%p 
-0.5%p 
-0.6%p 
-0.7%p 
-0.8%p 

in % 
4.6% 
5.0% 
5.6% 
6.2% 
7.0% 
+24  +3.6%p 
+41  +3.3%p 
+57  +3.2%p 
+66  +2.9%p 
+78  +2.6%p 
+11  +2.3%p 
+22  +2.0%p 
+33  +1.8%p 
+36  +1.5%p 
+37  +1.2%p 

in % 
15.2% 
15.1% 
15.2% 
15.2% 
15.6% 
+0.5%p 
+0.6%p 
+0.5%p 
+0.5%p 
+0.4%p 
-0.3%p 
-0.2%p 
-0.3%p 
-0.3%p 
-0.4%p 

in % 
8.5% 
9.8% 
10.1% 
10.2% 
10.5% 
+73  +5.9%p 
+86  +4.6%p 
+98  +4.2%p 
+101  +3.9%p 
+125  +3.5%p 
-34  +2.7%p 
-35  +1.4%p 
-47  +1.0%p 
-66  +0.8%p 
-106  +0.4%p 

Second 
Third 
Fourth 
Fifth 
  First 
2

+624 
+846 
+1,050 
+1,189 
+1,508 

Second 
Third 
Fourth 
Fifth 

o
i
r
a
n
e
c
S

o
i
r
a
n
e
c
S

in € 

in % 
7.2% 
938 
7.1% 
1,762 
7.4% 
2,362 
7.9% 
2,898 
3,642 
8.3% 
+763  +2.6%p 
+969  +2.6%p 
+1,154  +2.6%p 
+1,297  +2.5%p 
+1,430  +2.6%p 
+338  +1.3%p 
+286  +1.3%p 
+275  +1.2%p 
+249  +1.1%p 
+162  +1.1%p 

in € 
1,859 
1,831 
2,286 
2,941 
3,815 
+755 
+747 
+876 
+1,054 
+1,352 
+356 
+353 
+394 
+444 
+563 

TAXUD/2012/DE/323 

  
 
 
 
 
 
80 

Table 17: Average VAT bill of private households as a proportion of total household expenditure and in Euros per year, by 
income quintile in 2011 and reform scenarios 1 and 2, for AT, PL, PT, RO, SI and SK 

Income 
Quintiles 
First 
Second 
Third 
Fourth 
Fifth 
  First 
1

1
1
0
2

o
i
r
a
n
e
c
S

Second 
Third 
Fourth 
Fifth 
  First 
2

o
i
r
a
n
e
c
S

Second 
Third 
Fourth 
Fifth 

AT 

PL 

PT 

RO 

SI 

SK 

in % 
11.3% 
11.3% 
11.4% 
11.5% 
11.4% 
+2.9%p 
+3.0%p 
+2.8%p 
+2.7%p 
+2.6%p 
+0.9%p 
+1.0%p 
+0.8%p 
+0.7%p 
+0.6%p 

in € 
3,324 
3,183 
3,850 
4,449 
5,646 

in % 
9.3% 
9.7% 
10.1% 
10.7% 
11.5% 
+1,002  +5.6%p 
+1,001  +5.4%p 
+1,107  +5.2%p 
+1,195  +4.9%p 
+1,501  +4.1%p 
+310  +2.1%p 
+331  +1.9%p 
+314  +1.7%p 
+292  +1.3%p 
+357  +0.5%p 

in € 

in % 
8.3% 
427 
8.4% 
622 
8.8% 
832 
9.0% 
1,133 
1,885 
9.4% 
+301  +5.3%p 
+408  +4.8%p 
+504  +4.5%p 
+610  +4.2%p 
+796  +3.8%p 
+112  +2.2%p 
+139  +1.8%p 
+155  +1.5%p 
+155  +1.2%p 
+97  +0.8%p 

in € 

in % 
18.1% 
691 
18.0% 
1,145 
17.9% 
1,592 
17.8% 
2,139 
3,561 
17.7% 
+510  +0.6%p 
+751  +0.7%p 
+931  +0.8%p 
+1,151  +0.8%p 
+1,665  +0.8%p 
+207 
-0.1%p 
+273  +0.0%p 
+295  +0.1%p 
+322  +0.1%p 
+347  +0.1%p 

in € 

441 
611 
777 
983 
1,452 

in % 
9.0% 
10.2% 
10.3% 
10.6% 
11.0% 
+19  +3.0%p 
+31  +2.7%p 
+43  +2.6%p 
+54  +2.4%p 
+77  +2.3%p 
-2  +1.0%p 
+1  +0.5%p 
+5  +0.4%p 
+7  +0.2%p 
+7  +0.1%p 

in € 

in % 
13.8% 
938 
13.8% 
1,823 
13.6% 
2,295 
13.6% 
2,985 
4,100 
13.7% 
+351  +0.3%p 
+546  +0.3%p 
+658  +0.3%p 
+774  +0.3%p 
+968  +0.2%p 
+110  +0.2%p 
+105  +0.2%p 
+109  +0.2%p 
+75  +0.1%p 
+26  +0.1%p 

in € 
1,028 
1,292 
1,510 
1,717 
2,401 
+26 
+33 
+36 
+38 
+48 
+16 
+19 
+21 
+20 
+24 

Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 4.121 Polish zloty and 4.212 Romanian lei to 1 Euro. 

TAXUD/2012/DE/323 

  
 
 
 
 
 
81 

Table 18: Average VAT bill of private households as a proportion of expenditure and in Euros per year, by income quintile 
in 2011 and reform scenarios 1 and 2, for FI, SE and UK 

Income 
Quintiles 
First 
Second 
Third 
Fourth 
Fifth 
  First 
1

1
1
0
2

o
i
r
a
n
e
c
S

Second 
Third 
Fourth 
Fifth 
  First 
2

o
i
r
a
n
e
c
S

Second 
Third 
Fourth 
Fifth 

FI 

SE 

UK 

in % 

9.8% 
10.4% 
10.8% 
11.1% 
11.6% 
+2.4%p 
+2.3%p 
+2.2%p 
+2.1%p 
+2.0%p 
+1.1%p 
+0.9%p 
+0.8%p 
+0.7%p 
+0.6%p 

in € 

1,980 
2,966 
3,896 
4,892 
6,784 
+559 
+737 
+893 
+1,073 
+1,365 
+250 
+286 
+310 
+347 
+373 

in % 
11.0% 
11.0% 
11.6% 
12.1% 
12.3% 
+2.5%p 
+2.4%p 
+2.2%p 
+2.2%p 
+2.1%p 
+0.9%p 
+0.8%p 
+0.6%p 
+0.5%p 
+0.4%p 

in € 

2,636 
3,216 
4,210 
5,131 
6,595 
+694 
+796 
+929 
+1,077 
+1,303 
+241 
+250 
+230 
+232 
+229 

in % 

6.3% 
7.1% 
7.7% 
8.4% 
8.9% 
+3.6%p 
+3.4%p 
+3.2%p 
+2.9%p 
+2.6%p 
+1.9%p 
+1.6%p 
+1.4%p 
+1.0%p 
+0.7%p 

in € 

1,257 
1,797 
2,341 
3,119 
4,527 
+799 
+960 
+1,086 
+1,209 
+1,513 
+418 
+450 
+452 
+408 
+396 

Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 9.030 Swedish kronor and 0.868 British pounds to 1 Euro. 

TAXUD/2012/DE/323 

  
 
 
 
 
 
 
82 

Household types  

In  addition  to  disaggregating  households  according  to  income  quintiles,  we  looked  at 
effects  on  subgroups  of  households  according  to  all  relevant  demographic  criteria 
available  from  the  Eurostat  database.  All  results  are  collected  in  the  spreadsheets 
annexed; results on the breakdown by active and non-active households and household 
types  are  also  listed  in  the  Addendum  containing  the  more  detailed  analyses  for  all 
countries.  Here,  we  limit  the  discussion  to  the  group  that  faces  the  highest  VAT 
payments as a proportion of expenditure in 2011, and the group that is most affected by 
the  two  reform  scenarios  in  absolute  terms  and  as  measured  by  VAT  payments  as  a 
fraction of expenditure.79  

In 2011 (Table 19), the group that pays most VAT as a fraction of expenditure is the 
group that benefits least from exemptions, zero and reduced rates. 
Some groups rank first in more than 2 countries:80  
 

three  or  more  active  persons  in  the  household  (Germany,  Greece,  Spain,  Ireland, 
Italy, Latvia, Portugal, the United Kingdom)  
three  or  more  adults,  with  or  without  children  (Bulgaria,  the  Czech  Republic, 
Denmark, France, Finland and Sweden) 

 

  households with a head under the age of 30 (Estonia, Cyprus, Luxembourg, Malta 

and Austria)  
the fifth income quintile (Belgium, the Netherlands and Poland) 

 
  households with a self-employed head (Lithuania, Slovenia, Slovakia). 

Table  20  lists  the  socio-economic  group  most  affected  by  reform  scenarios  1  and  2, 
measured  by  the  increase  in  VAT  payments  as  a  fraction  of  total  expenditure  (in 
percentage  points)  for  all  countries.  As  a  general  rule,  we  observe  that,  in  almost  all 
countries, when measured as a fraction of expenditure, the group most affected is the 
group that has (presumably) the lowest disposable income: 
  The first income quintile is listed thirteen times81,  
 

followed by households with no active member (five times)  

79 Please refer to section 2.1 for the definition of the groups and to the preface to learn which breakdown is 

unavailable for which country.  

80 In some countries, as indicated in the table, there is a tie between two groups.  
81 In scenario 1 the first income quintile is listed 12 times. In Belgium households in the first quintile are 
most  affected  in  scenario  2  whereas  scenario  1  affects  households  with  three  or  more  adults  and 
dependent children the most.  

TAXUD/2012/DE/323 

 
 
                                                      
83 

  and households where the reference person is 60 years or older (four times).82  

The picture changes again when we look at who benefits most from zero and reduced 
rates in absolute terms, considering all breakdowns by household characteristics. Table 
21  shows  the  increase  in  absolute  VAT  payments  for  the  group  most  affected  in 
scenarios 1 and 2. Because household sizes differ, we equivalise VAT payments using 
the  number  of  adult  equivalents  provided  by  Eurostat  for  each  category.83  In  19 
countries the fifth quintile is the group most affected in absolute terms by scenario 1.84 
In  these  countries,  even  when  we  consider  different  breakdowns  of  households,  the 
richest  households  always  stand  to  lose  the  most  in  absolute  terms  following  the 
abolition of zero and reduced rates. Put differently: in absolute terms, these households 
benefit the most from zero and reduced rates. In Hungary, Romania and Slovakia these 
are households headed by a person over the age of 60 years. In these countries, reduced 
rates  only  apply  to  few  goods  and  services,  including  pharmaceutical  products  and 
medical appliances, which is why older people particularly suffer from the abolition of 
reduced rates. Reducing the standard rate according to scenario 2, however, changes the 
picture:  Only  in  four  countries  (France,  Luxembourg,  the  Netherlands  and  Portugal), 
households in the fifth quintile remain the group most affected by the reform. In most 
countries,  households  which  are  not  active  on  the  labour  market  (that  is,  there  is  no 
active person living in the household, or the household is headed by an inactive person) 
are  now  those  most  affected.  Thus,  in  many  countries,  high  income  households  are 
compensated  for  their  losses  generated  by  the  abolition  of  the  reduced  rate(s)  by  the 
lower standard rate in the revenue neutral scenario.  

82  In  the  remaining  countries,  households  headed  by  inactive  persons  who  are  neither  retired  nor 
unemployed, headed by a person below the age of 30, or headed by an unemployed person, rank first.  
83 Eurostat does not provide this number for income quintiles. Therefore we equivalise all quintiles with the 
average number of adult equivalents, implicitly assuming that the households in the quintiles are equally 
sized. 

84 For Italy, we do not have comparable information for income quintiles. Here households with three or 
more  active  members  are  the  ones  most  affected.  Presumably,  additional  active  members  add  to  a 
household’s income.  

TAXUD/2012/DE/323 

 
                                                      
Table  19:  Most  affected  socio-economic  groups  in  2011,  measured  by  the  proportion  of 
VAT expenditure to total household expenditure 

Country 

2011 

Group 

Share of Expenditure 

84 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

fifth quintile 
3 or more adults + 
3 or more adults 
3 or more adults +  
3 or more active persons* 
less than 30 years 
3 or more active persons 
3 or more active persons* 
3 or more adults +* 
3 or more active persons 
3 or more active persons 
less than 30 years 
3 or more active persons* 
employed except employees 
less than 30 years*  
other inactive person 
less than 30 years 
fifth quintile 
less than 30 years 
fifth quintile 
3 or more active persons 
first quintile* 
employed except employees 
employed except employees* 
3 or more adults + 
3 or more adults 
3 or more active persons 

11.1% 
13.9% 
12.5% 
14.4% 
9.0% 
13.2% 
11.6% 
7.8% 
9.1% 
9.6% 
9.4% 
7.5% 
15.7% 
15.4% 
7.0% 
18.1% 
11.4% 
8.3% 
12.1% 
11.5% 
9.9% 
18.1% 
11.2% 
14.0% 
12.3% 
12.6% 
9.2% 

Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
"+" indicates a household with dependent children 
"*" indicates that several groups are affected equally 

Study on VAT rates structure 

 
85 

Table  20:  Most  affected  socio-economic  groups  by  reform  scenarios  1  and  2  in  Member 
States, measured by the relative rise in VAT expenditure 

Country 

Group 

Rise in VAT/EXP 

Scenario 1 

Scenario 2 

- 

+3.0%p 

3 or more adults+ / first quintile 
- 
no active person* 
no active person* 
first quintile   
other inactive person* 
first quintile 
first quintile 
60 years or over* 
first quintile 
no active person* 
first quintile 
no active person* 
no active person* 
first quintile 
6o years or over* 
first quintile 
less than 30 years 
unemployed person 
first quintile 
first quintile 
60 years or over 
first quintile 
60 years or over* 
first quintile* 
other inactive person   
first quintile 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
"+" indicates a household with dependent children 
"*" indicates that several groups are affected equally 
Remark: There are basically no reform effects in Bulgaria 

+2.9%p 
+0.2%p 
+2.3%p 
+0.5%p 
+2.7%p 
+3.7%p 
+3.8%p 
+4.4%p 
+3.6%p 
+3.0%p 
+0.7%p 
+1.0%p 
+3.6%p 
+1.6%p 
+5.9%p 
+2.8%p 
+3.3%p 
+5.6%p 
+5.3%p 
+1.8%p 
+3.0%p 
+0.4%p 
+2.4%p 
+3.1%p 
+3.6%p 

- 

+0.9%p 

+1.3%p 
+0.0%p 
+1.1%p 
+0.1%p 
+0.7%p 
+0.7%p 
+2.0%p 
+1.3%p 
+0.9%p 
+1.3%p 
-0.0%p 
+0.7%p 
+2.3%p 
-0.1%p 
+2.7%p 
+1.4%p 
+1.2%p 
+2.1%p 
+2.2%p 
+1.1%p 
+1.0%p 
+0.3%p 
+1.1%p 
+1.6%p 
+1.9%p 

TAXUD/2012/DE/323 

Table  21:  Most  affected  socio-economic  groups  by  reform  scenarios  1  and  2  in  Member 
States, measured by equivalised absolute increase in VAT expenditure 

Country 

Scenario 1 

Scenario 2 

Group 

VAT 

Group 

VAT 

86 

- 

+191 
- 

retired person* 

third quintile 
single person 

first quintile   
fifth quintile   

fifth quintile   
- 

+833  no active person   
+668  no active person   
+39 
+50  no active person   

+912  3 or more adults +  
- 
+175  no active person   
+35  no active person 

+630 
+39 
+610  no active person 
+599 
+1,149 
+1,274  60 years or over 

three or more adults* 
fifth quintile   
fifth quintile   
non-manual worker  
fifth quintile   
fifth quintile   
fifth quintile   
fifth quintile   
3 or more active persons 
fifth quintile   
fifth quintile   
no active person 
fifth quintile   
60 years or over 
fifth quintile   
fifth quintile   
fifth quintile   
fifth quintile   
fifth quintile   
60 years or over 
fifth quintile   
60 years or over 
fifth quintile   
fifth quintile   
fifth quintile   

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
"+" indicates a household with dependent children 
"*" indicates that several groups are affected equally 
Remark: There are basically no reform effects in Bulgaria 
Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny, 7.451 Danish kroner, 0.706  Latvian 
lats,  3.453  Lithuanian  litai,  279.370  Hungarian  forints,  4.121  Polish  zloty,  4.212  Romanian  lei,  9.030 
Swedish kronor and 0.868 British pounds to 1 Euro. 

+44  60 years or over 
+541  no active person   
+28  60 years or over 
+916  60 years or over 
+899  other inactive person 
retired person 
+946 

+75  60 years or over 
+715  no active person   
+878 
+944 
+437  no active person* 
+930 

+69 
+10 
+194 
+7 
+87 
+66 
+487 
+217 
+175 
+170 
-1 
+38 
+925 
-6 
+253 
+366 
+292 
+105 
+194 
+27 
+104 
+20 
+249 
+328 
+343 

fifth quintile   
single person 

fifth quintile   

fifth quintile   

+2,131 

Study on VAT rates structure 

 
87 

2.4  Results: VAT paid by non-household entities 

Scenario 1 – Abolition of Reduced Rates 

Table 22 and Figure 2 show, for all Member States (EU-27), the results of the abolition 
of  zero  and  reduced  rates for the economy  as  a  whole  and for economic  agents  other 
than  households.  Note  that  these  results  are  mechanical  in  the  sense  that  they  do  not 
take into account the possible reactions to increases in effective rates (in terms of both 
substitution effects and compliance). This caveat is particularly important, because the 
magnitude of the resulting increases in VAT liability is rather large in several countries, 
with six countries experiencing an overall increase in VAT liability in excess of 30 % 
(Spain  43 %,  Ireland  38 %,  Italy  and  Poland  35 %,  Malta  and  Portugal  34 %).  Some 
countries  that  do  not  rely  on  zero  and  reduced  rates,  on  the  other  hand,  would  see 
minimal  increases  in  the  overall  VAT  liability  (Bulgaria  0 %,  Denmark  and  Slovakia 
1 %,  Lithuania  2 %,  Estonia  3 %  and  Romania  5 %).  The  average,  economy-wide 
increase in the VAT liability is 19 %, and so is the median. 

As  can  be  seen  in  Figure  2,  in  most  countries,  the  Intermediate  Consumption  and 
“Others” sectors85  have  a  lower  relative  increase  in the  VAT  burden  than  the  average 
economy. In other words, the highest relative increase in the VAT liability is borne by 
the  Household  sector  (discussed  earlier  in  section  2.3).  This  is  not  surprising,  since 
most of the reduced rates are targeted at consumption goods. There are, however, some 
exceptions. For instance, in Italy, Spain, France and the Czech Republic, the “Others” 
sectors  register  a  higher  percentage  increase  in  liability  than  the  household  sector 
(although not in absolute terms), whereas in Cyprus, Romania, Lithuania, Estonia and 
Latvia the same is true for the Intermediate Consumption sector. These results are due 
to the specific features of each country’s VAT system (also see the country sheets in the 
Addendum). For the whole EU-27, the average increase in VAT liability for the sector 
Intermediate Consumption is 14 %, with the median at 11 %. For the “Others” sector, 
the average increase is 13 %, with the median at 8 %. 

85  “Others”  includes  Government  and  NPISH  (Non-Profit  Institutions  Serving  Households),  as  well  as 

GFCF expenses exempted from VAT. 

TAXUD/2012/DE/323 

 
                                                      
Table 22: Scenario 1 – Abolition of zero and reduced rates 

88 

Country 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

Mean 
Median 

Total 
New 
VAT 
38,003 
4,010 
17,723 
26,454 
247,910 
1,745 
30,265 
103,339 
212,821 
14,983 
180,661 
1,768 
2,488 
3,880 
3,926 
13,171 
724 
54,486 
31,442 
47,623 
22,586 
22,820 
4,084 
7,658 
22,201 
44,125 
184,118 

% 
Change 

24% 
0% 
14% 
1% 
13% 
3% 
22% 
43% 
22% 
38% 
35% 
24% 
6% 
2% 
20% 
13% 
34% 
18% 
19% 
35% 
34% 
5% 
23% 
1% 
14% 
16% 
23% 

19% 
19% 

IC 

8,316 
816 
4,003 
6,959 
41,872 
288 
3,670 
15,161 
27,403 
3,051 
18,818 
209 
495 
462 
1,050 
2,126 
113 
14,811 
6,120 
7,875 
4,188 
2,760 
602 
1,147 
5,288 
10,852 
42,435 

% 
Change 

Others 

% 
Change 

8,389 
620 
3,569 
4,862 
52,158 
365 
3,945 
19,326 
56,048 
3,262 
40,284 
467 
316 
555 
1,378 
2,689 
82 
13,048 
4,723 
8,856 
2,630 
7,334 
672 
1,381 
4,864 
9,035 
18,667 

23% 
0% 
5% 
0% 
8% 
5% 
12% 
26% 
10% 
18% 
23% 
42% 
7% 
6% 
11% 
8% 
25% 
8% 
13% 
26% 
27% 
12% 
19% 
1% 
8% 
7% 
15% 

14% 
11% 

20% 
0% 
15% 
0% 
1% 
2% 
2% 
50% 
23% 
38% 
44% 
1% 
3% 
1% 
15% 
10% 
11% 
7% 
10% 
27% 
26% 
3% 
17% 
0% 
6% 
8% 
6% 

13% 
8% 

Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

and own calculations. 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
  
  
  
  
89 

Figure 2: Scenario 1 – Changes in VAT liabilities of non-households 

Source: Table 22 

Table 23 and Table 24 provide more minute details on the sector consequences of the 
abolition  of  reduced  rates.  In  most  countries  seven  sectors  are  affected  through  their 
intermediate purchases: 
  Post and Telecommunications 
  Real Estate Activities 
  Financial Intermediation 
  Public Administration and Defence 
  Education 
  Health and Social Work 
  Other Community, Social and Personal Services 

In addition, five countries (Belgium,  Denmark, Ireland, Italy and Portugal) have other 
(minor) liabilities arising in other sectors.  

Of  the  seven  main  sectors  listed  above,  the  highest  average  proportional  increase 
resulting  from  an  abolition  of  zero  and  reduced  rates  occurs  in  the  Real  Estate  and 
Education  sectors  (20 %),  followed  by  Health  and  Social  Work,  Other  Community, 

TAXUD/2012/DE/323 

0%10%20%30%40%50%ESIEITPLMTPTBECYSIUKELFRLUATNLSECZFIDEHULVROEELTDKSKBGTotal % ChangeIC % ChangeOther % Change 
 
 
 
90 

Social and Personal Services, and Public Administration and Defence (19 %, 18 % and 
11 %, respectively). Post and Telecommunications and Financial Intermediation (which 
have a lower degree of connectivity with goods at reduced or zero rates) would see the 
lowest increase in VAT liability, 5.5 % and 6.6 %, respectively. 

(Non-Profit 

Table  23  and  Table  24  also  break  down  the  “Others”  category  into  Government  and 
NPISHs 
Institutions  Serving  Households).  As  mentioned  above, 
Government and NPISH final consumption – being largely exempt from VAT – would 
also  see  a  substantial  increase  in  VAT  liabilities  (23.9 %  and  31.8 %,  respectively). 
While  the  Government  is  the  collector  of  VAT,  and  therefore  in  most  cases  overall 
Government finances would not be affected, the distribution of VAT liabilities among 
government agencies is very uneven. This would likely lead to the need of budgetary 
reallocations that can be rather complicated. With respect to NPISHs, it is apparent that 
the abolition of zero and reduced rates would lead to substantially tighter budgets, in the 
absence  of  compensatory  increases  in  revenues/subsidies,  depending  on  the  type  of 
service they perform for the household sector. 

Finally, we note that (as seen for the overall changes in IC and Others liabilities above) 
there is wide dispersion across countries with regard to the sectors that would suffer the 
largest  increases.  Within  Intermediate  Consumption,  the  increase  ranges  from  167 % 
for Real Estate activities in Cyprus, to zero or almost-zero values for several countries 
and sectors. It is difficult, however, to discern patterns, to the extent that such increases 
are  the  result  of  the  interaction  between  existing  reduced  rates  and  patterns  of 
consumption, approximating in many cases random events. 

With regard to Government final consumption, it is noticeable that ten countries would 
see increases in their VAT bill of at least 25 % (with the highest values registered for 
Luxembourg, 82 %, and Poland, 72 %). 

Study on VAT rates structure 

 
 
 
91 

Table 23: Scenario 1 – Effects on main exempt sectors and activities 

Post and Tele-
communications 

Real Estate 
Activities 

Financial 
Intermediation 

Public Admin 
and Defence; 
Compulsory 
Social Security 

Education 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

48 
0 
21 
53 
803 
6 
2 
153 
275 
37 
177 
1 
1 
0 
6 
5 
1 
1,299 
75 
16 
63 
66 
4 
14 
0 
0 
438 

9% 
- 
3% 
0% 
5% 
4% 
4% 
5% 
5% 
6% 
22% 
1% 
3% 
1% 
3% 
3% 
9% 
3% 
4% 
6% 
8% 
13% 
7% 
3% 
- 
- 
7% 

976 
323 
1,509 
1,509 
6,562 
10 
338 
2,166 
2,491 
256 
347 
28 
201 
134 
48 
604 
0 
3,864 
1,585 
2,363 
133 
916 
79 
110 
1,627 
3,808 
3,396 

55% 
0% 
2% 
0% 
2% 
2% 
0% 
45% 
3% 
19% 
24% 
167% 
4% 
2% 
9% 
8% 
- 
1% 
16% 
30% 
81% 
5% 
33% 
1% 
1% 
2% 
2% 

1,489 
82 
693 
621 
9,733 
32 
508 
1,696 
5,209 
487 
3,123 
24 
34 
57 
684 
344 
19 
2,214 
1,014 
1,093 
615 
310 
80 
151 
479 
947 
8,973 

6% 
0% 
2% 
0% 
2% 
2% 
5% 
13% 
4% 
10% 
10% 
9% 
5% 
11% 
5% 
5% 
16% 
8% 
10% 
12% 
7% 
12% 
5% 
2% 
6% 
6% 
6% 

1,303 
170 
555 
1,403 
8,897 
99 
1,260 
3,335 
5,822 
403 
5,170 
54 
103 
69 
96 
442 
23 
4,645 
974 
958 
658 
280 
128 
417 
1,192 
2,114 
9,410 

17% 
0% 
2% 
0% 
8% 
2% 
5% 
15% 
6% 
28% 
21% 
6% 
12% 
6% 
29% 
6% 
17% 
6% 
10% 
17% 
21% 
9% 
16% 
1% 
7% 
4% 
12% 

312 
58 
252 
536 
2,479 
41 
135 
644 
1,488 
217 
486 
9 
37 
45 
19 
170 
3 
648 
348 
406 
179 
188 
60 
95 
354 
623 
2,883 

19% 
0% 
9% 
0% 
17% 
6% 
21% 
25% 
24% 
25% 
18% 
41% 
5% 
19% 
50% 
8% 
50% 
13% 
10% 
27% 
24% 
20% 
24% 
2% 
17% 
32% 
22% 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

19.6% 
Mean 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

19.7% 

10.6% 

5.5% 

6.6% 

and own calculations. 

VTTL= VAT Total Tax Liability 

TAXUD/2012/DE/323 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
92 

Table 24: Scenario 1 – Effects on main exempt sectors and activities (continued from Table 
23) 

Health and 
Social Work 

Other 
Community, 
Social and 
Personal 
Services 

Other IC 

Government 
final 
consumption 

NPISH final 
consumption 

Base 
VTTL 

1,678 
117 
614 
1,825 
8,993 
54 
803 
3,061 
4,509 
727 
5,054 
24 
54 
105 
85 
342 
11 
1,945 
1,091 
737 
767 
705 
121 
212 
890 
1,661 
10,662 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

Base 
VTTL 

% 
incr. 

26% 
0% 
14% 
0% 
15% 
12% 
29% 
27% 
16% 
19% 
35% 
18% 
8% 
2% 
33% 
16% 
42% 
20% 
13% 
45% 
26% 
20% 
19% 
1% 
20% 
10% 
29% 

419 
67 
162 
299 
1,428 
34 
252 
1,550 
5,331 
181 
513 
8 
35 
27 
6 
57 
34 
409 
331 
696 
434 
0 
33 
135 
337 
941 
1,066 

29% 
0% 
20% 
0% 
9% 
4% 
20% 
34% 
15% 
16% 
21% 
18% 
8% 
8% 
64% 
8% 
29% 
27% 
25% 
24% 
29% 
0% 
22% 
2% 
15% 
19% 
12% 

564 

10% 

713 

0% 

277 
421 

11% 
14% 

495 

48% 

1,266 
83 
827 
943 
7,823 
66 
82 
2,946 
9,591 
287 
7,926 
4 
26 
93 
49 
745 
33 
2,160 
762 
1,137 
311 
731 
125 
285 
850 
1,658 
1,775 

43% 
0% 
19% 
0% 
8% 
5% 
13% 
37% 
34% 
41% 
12% 
16% 
35% 
4% 
82% 
23% 
11% 
14% 
40% 
72% 
22% 
12% 
24% 
0% 
17% 
26% 
36% 

58 
4 
151 
0 
1,535 
11 
40 
102 
861 
131 
207 
1 
1 
0 
7 
186 
2 
133 
45 
126 
105 
259 
6 
7 
97 
0 
1,745 

41% 
0% 
18% 

- 
9% 
0% 
58% 
54% 
61% 
10% 
24% 
43% 
0% 

- 
49% 
0% 
2% 
140% 
41% 
24% 
39% 
37% 
86% 
0% 
27% 

- 
0% 

   31.8% 
Mean 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

   16.6% 

   23.9% 

19.0% 

17.7% 

and own calculations. 

VTTL= VAT Total Tax Liability 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
93 

Scenario 2 – Revenue-Neutral Abolition of Reduced Rates 

Table 25 displays the results of a simulation that abolishes zero and reduced rates, but 
decreases  the  overall  standard  rate  to  achieve  a  revenue-neutral  outcome  for  each 
country. Table  10 and  Figure  1 in section  2.2 display the 2011 standard rates and the 
“revenue neutral” rates that would be obtained.  

By  construction,  the  overall  VAT  liability  does  not  change,  but  there  are  uneven 
consequences  on  the  various  sectors.  As  discussed  in  section  2.3,  the  increases  in 
liabilities  for  the  Household  sector  are  substantially  lower  than  in  scenario  1,  but  in 
most countries, private households face an increase in their VAT burden in this revenue 
neutral  scenario.  Figure  3  reveals  that  the  revenue-neutral  abolition  of  reduced  rates 
would  generally  affect  the  other  institutional  sectors  in  a  positive  way,  leading  to 
substantial reductions in the VAT liability for  Intermediate Consumption (IC) and for 
“Others”, with very few exceptions (notably Cyprus, Romania, Lithuania, Estonia and 
Latvia for Intermediate Consumption, and Italy, Spain, France and the Czech Republic 
for the “Others” category). The main reason for such favourable outcomes for the non-
household sectors is the fact that indeed, as seen in Figure 3 and Table 25, in most cases 
the reduction in the standard rate is more than sufficient to compensate for the abolition 
of  the  reduced  and  zero  rates  applying  to  the  goods  purchased  by  the  Intermediate 
Consumption  and  “Others”  sectors.  The  average  reduction  in  VAT  liability  for  the 
Intermediate  Consumption  sector  is  -3.9 %,  the  median  -5.1 %.  For  the  “Others” 
category,  the  average  and  median  reductions  are  -4.8 %  and  -3.2 %,  respectively. 
Taking the Intermediate Consumption and “Others” sectors together, the reductions in 
liability amount to 4.6 % on average (median 4.3 %). We find small increases in three 
Member  States  (Italy  1.1 %;  Lithuania  1.0 %;  Romania  0.6 %)  and  virtually  no 
increases  in  Estonia.  In  all  other  Member  States  VAT  liabilities  for  Intermediate 
Consumption  and  “Others”  taken  together  decrease,  with  decreases  ranging  from 
negligible amounts in Bulgaria to high decreases of 12.4 % in Greece. 

One  conclusion  that  might  be  drawn  from  this  exercise  is  that,  to  the  extent  that 
unrecoverable  VAT  on  inputs  induces  unfavourable  economic  distortions  in  the 
affected  sectors,  the  revenue-neutral  scenario  would  seem  to  lead,  for  most  countries 
and most sectors, into the direction of greater economic efficiency. 

TAXUD/2012/DE/323 

 
 
 
Table 25: Scenario 2 – Revenue-neutral abolition of reduced and zero rates (new liability 
and percentage change from baseline) 

94 

Country 

IC 

6,698 
815 
3,496 
6,869 
37,125 
279 
3,009 
10,610 
22,534 
2,205 
13,951 
168 
466 
453 
877 
1,877 
84 
12,544 
5,129 
5,827 
3,132 
2,635 
489 
1,134 
4,637 
9,362 
34,528 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

Average 
Median 

% 
Change 
-1.3% 
-0.2% 
-8.1% 
-1.3% 
-4.6% 
1.9% 
-7.9% 
-12.1% 
-9.4% 
-14.7% 
-8.8% 
14.3% 
0.5% 
3.7% 
-7.0% 
-4.4% 
-6.4% 
-8.4% 
-5.3% 
-7.0% 
-5.1% 
6.9% 
-3.2% 
0.1% 
-5.0% 
-7.3% 
-6.2% 

-3.9% 
-5.1% 

Others 

6,757 
619 
3,117 
4,799 
46,244 
354 
3,234 
13,524 
46,089 
2,358 
29,866 
375 
297 
544 
1,152 
2,375 
62 
11,051 
3,958 
6,554 
1,967 
7,002 
546 
1,366 
4,264 
7,795 
15,189 

% 
Change 
-3.2% 
-0.1% 
0.5% 
-1.3% 
-10.0% 
-1.4% 
-16.2% 
5.0% 
1.5% 
-0.5% 
6.5% 
-18.6% 
-3.0% 
-1.2% 
-4.2% 
-3.1% 
-16.8% 
-9.4% 
-7.9% 
-6.1% 
-5.7% 
-1.6% 
-5.3% 
-1.0% 
-6.8% 
-6.8% 
-13.6% 

-4.8% 
-3.2% 

IC & 
Others 
13,455 
1,433 
6,614 
11,668 
83,369 
634 
6,243 
24,133 
68,623 
4,563 
43,817 
543 
763 
997 
2,029 
4,252 
146 
23,595 
9,087 
12,381 
5,099 
9,638 
1,035 
2,500 
8,901 
17,157 
49,716 

% 
Change 
-2.3% 
-0.2% 
-4.3% 
-1.3% 
-7.7% 
0.0% 
-12.4% 
-3.2% 
-2.4% 
-7.9% 
1.1% 
-10.6% 
-0.9% 
1.0% 
-5.5% 
-3.7% 
-11.1% 
-8.9% 
-6.5% 
-6.6% 
-5.3% 
0.6% 
-4.3% 
-0.5% 
-5.9% 
-7.0% 
-8.6% 

-4.6% 
-4.3% 

Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

and own calculations. 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
  
  
  
  
 
95 

Figure 3: Scenario 2 – Revenue neutral abolition of reduced and zero rates 

Source: Table 25. 

2.5  Results: Effects of different scenarios on VAT liability86  

Table 26 shows the static effects of the abolition of reduced rates on the overall VAT 
liability  as  a  percentage  of  GDP  for  each  country  and  for  scenarios  1  and  3  (for  the 
latter, we show the results for the compensation of the bottom 40 % of households as 3a 
and the results for the compensation  of the bottom 20 % only as 3b). Table 27 shows 
the same data, expressed in million Euros. Scenario 2 is revenue-neutral by design, and 
therefore does not require a discussion here. 

In scenario 1, the countries that had registered the highest percentage change in VAT 

86 The estimates of VAT payments that are presented throughout this report (including in this section) refer 
to the concept of VAT Liability, namely the amount of tax that is due from various economic subjects on 
the basis of existing, country-specific VAT legislation and regulations. Thus, this concept assumes that 
collection of taxes is perfect. The reason to use this concept is that statistics on the sectoral distribution of 
VAT  payments  are  not  available.  In  reality,  however,  tax  enforcement  is  not  perfect  for  a  variety  of 
reasons,  ranging  from  the  legal  to  the  illegal  (for  instance,  use  of  legal  tax  avoidance  schemes; 
uncollectable taxes due to bankruptcies; or outright fraud). 

TAXUD/2012/DE/323 

-20%-15%-10%-5%0%5%10%15%20%CYROLTEELVSKBGBEDKSIHUDEFIPTATUKMTLUPLSEELCZNLITFRESIEIC % ChangeOthers % Change 
 
                                                      
96 

liability  (Figure  2)  also  experience  the  largest  increase  as  a  proportion  of  GDP.  The 
potential  increase  ranges  from  more  than  3 %  of  GDP  for  Poland  and  Portugal,  to 
virtually zero for Bulgaria and Denmark. The average for the EU-27 countries is 1.6 % 
of GDP, which is also the median. 

Scenario 3a, that stipulates to compensate the bottom 40 % of the income distribution, 
reduces the overall potential increase in VAT liability to an average of 1.3 % of GDP 
(which again is the median for the EU-27). The highest increases are again registered in 
Poland and Portugal (2.7 %), followed by  Italy (2.5 %) and Spain (2.3 %). As before, 
no  increase  is  registered  for  Bulgaria  and  Denmark.  Scenario  3b,  which  only 
compensates  the  bottom  20 %  of  households,  produces  an  average  increase  in  VAT 
liability of 1.5 % of GDP, and a median of 1.4 %. The same countries as in 3a register 
the highest and lowest increases, respectively. On average, the compensation required 
to  shield  the  bottom  40 %  of  households  from  the  effects  of  VAT  increases  is  0.3 % 
(with a median of 0.4 %) and for the bottom 20 % it declines to 0.2 % of GDP (with a 
median of 0.2 %). 

These  simulations  show  that  the  potential  for  increases  in  VAT  revenues  from  the 
abolition of zero and reduced rates is substantial for a considerable number of countries 
–  these  funds  could,  for  instance,  help  achieve  budget  deficit  reduction  targets. 
However, as seen earlier, this would come at the cost of potentially difficult-to-accept 
increases in the liability of households, and in many cases of non-households. If, on the 
other  hand,  a  mechanism  were  put  in  place  to  compensate  lower-income  households 
(not  a  trivial  task  in  itself),  the  effect  on  revenues  would  decrease,  but  would  remain 
substantial  even  for  a  number  of  countries  that  have  to  deal  with  big  budgetary 
problems  at  the  moment.  The  challenge  would  obviously  be  to  set-up  and  administer 
such a compensation system. 

Study on VAT rates structure 

 
 
97 

Table 26: Revenue effects and compensation, scenarios 1 and 3, expressed in % of GDP 

Country 

Baseline 
VAT 
Liability 

Scenario 1 
Increase 

Scenario 3a 

Scenario 3b 

Comp. 

Increase 

Comp. 

Increase 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

8.3% 
10.4% 
10.0% 
10.9% 
8.5% 
10.6% 
11.9% 
6.8% 
8.7% 
6.8% 
8.5% 
7.9% 
11.6% 
12.3% 
7.7% 
11.7% 
8.2% 
7.7% 
8.8% 
9.5% 
9.9% 
16.6% 
9.2% 
11.0% 
10.3% 
9.8% 
8.6% 

2.0% 
0.0% 
1.4% 
0.1% 
1.1% 
0.3% 
2.6% 
2.9% 
1.9% 
2.6% 
3.0% 
1.9% 
0.7% 
0.2% 
1.5% 
1.5% 
2.8% 
1.4% 
1.7% 
3.3% 
3.3% 
0.8% 
2.1% 
0.1% 
1.4% 
1.6% 
2.0% 

0.4% 
0.0% 
0.4% 
0.0% 
0.3% 
0.0% 
0.7% 
0.6% 
0.4% 
0.5% 
0.5% 
0.4% 
0.1% 
0.0% 
0.2% 
0.4% 
0.6% 
0.3% 
0.4% 
0.6% 
0.6% 
0.1% 
0.4% 
0.0% 
0.3% 
0.4% 
0.5% 

1.6% 
0.0% 
1.0% 
0.1% 
0.8% 
0.3% 
1.9% 
2.3% 
1.5% 
2.1% 
2.5% 
1.6% 
0.6% 
0.2% 
1.3% 
1.2% 
2.1% 
1.1% 
1.3% 
2.7% 
2.7% 
0.7% 
1.7% 
0.1% 
1.2% 
1.2% 
1.5% 

0.2% 
0.0% 
0.2% 
0.0% 
0.1% 
0.0% 
0.3% 
0.3% 
0.2% 
0.2% 
0.2% 
0.1% 
0.1% 
0.0% 
0.1% 
0.2% 
0.3% 
0.2% 
0.2% 
0.3% 
0.3% 
0.0% 
0.2% 
0.0% 
0.1% 
0.2% 
0.2% 

1.8% 
0.0% 
1.2% 
0.1% 
1.0% 
0.3% 
2.3% 
2.6% 
1.7% 
2.4% 
2.8% 
1.8% 
0.7% 
0.2% 
1.4% 
1.4% 
2.5% 
1.2% 
1.5% 
3.1% 
3.1% 
0.8% 
2.0% 
0.1% 
1.3% 
1.4% 
1.7% 

1.5% 
Average 
1.4% 
Median 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

0.3% 
0.4% 

1.3% 
1.3% 

1.6% 
1.6% 

0.2% 
0.2% 

and own calculations. 

Legend:  Scenarios  3a  and  3b:  Comp.  =  compensation  to  1st+2nd  and  1st  quintile(s)  of  households, 

respectively. 

TAXUD/2012/DE/323 

  
  
  
  
  
  
  
  
  
  
  
  
Table 27: Revenue effects and compensation, scenarios 1 and 3 (Million Euros) 

98 

Country 

Baseline VAT 
Liability  

Scenario 1 
Increase 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

30,612 
4,001 
15,481 
26,112 
219,804 
1,694 
24,813 
72,315 
175,004 
10,831 
133,938 
1,422 
2,340 
3,805 
3,281 
11,630 
541 
46,146 
26,349 
35,241 
16,892 
21,789 
3,319 
7,573 
19,465 
38,067 
149,809 

7,391 
9 
2,241 
342 
28,106 
51 
5,453 
31,024 
37,817 
4,152 
46,722 
345 
148 
76 
644 
1,542 
183 
8,340 
5,093 
12,381 
5,694 
1,032 
764 
85 
2,736 
6,057 
34,309 

Scenario 3a 

Scenario 3b 

Comp. 

1,381 
1 
615 
103 
7,070 
8 
1,490 
6,874 
7,395 
754 
7,428 
64 
26 
11 
87 
354 
43 
1,976 
1,309 
2,314 
1,023 
114 
149 
23 
550 
1,480 
8,564 

Increase 
6,010 
8 
1,626 
239 
21,037 
43 
3,963 
24,151 
30,423 
3,398 
39,294 
281 
122 
65 
557 
1,188 
140 
6,364 
3,784 
10,067 
4,671 
917 
616 
63 
2,186 
4,577 
25,745 

Comp. 

624 
0 
331 
41 
2,925 
4 
695 
3,007 
3,204 
335 
2,786 
25 
12 
4 
36 
160 
18 
1,020 
635 
979 
469 
42 
57 
10 
245 
694 
3,867 

Increase 
6,767 
8 
1,910 
301 
25,181 
48 
4,757 
28,017 
34,613 
3,817 
43,937 
320 
136 
72 
608 
1,382 
165 
7,320 
4,458 
11,402 
5,225 
990 
707 
76 
2,492 
5,363 
30,442 

Average 
Median 
Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

1,896 
615 

8,990 
2,736 

7,094 
2,186 

823 
331 

8,167 
2,492 

and own calculations.  

Legend:  Scenarios  3a  and  3b:  Comp.  =  compensation  to  1st+2nd  and  1st  quintile(s)  of  households, 

respectively. 

Study on VAT rates structure 

  
  
  
  
  
  
  
  
  
99 

Figure 4: Increase in VAT liability (percent of GDP) 

Source:  WIOD,  EUROSTAT,  IBFD,  European  Commission,  Communications  from  national  authorities 

and own calculations. 

3  General equilibrium effects of VAT reforms 

To  assess  the  effects  of  different  VAT  reform  scenarios  on  sectoral  production  and 
employment  for  task  4,  we  use  the  WorldScan  Computational  General  Equilibrium 
(CGE) model. Section 3.1 summarises the main features of the WorldScan model, the 
inputs and adjustments necessary to run the general equilibrium scenarios are described 
in section 3.2, while section 3.3 summarises the results of these scenarios. 

3.1  Methodology: The WorldScan model 

WorldScan is a recursively dynamic CGE model (Lejour et al., 2006). The model fits 
into  the  tradition  of  applied  general  equilibrium  models:  it  builds  upon  neoclassical 
theory,  has  strong  micro-foundations  and  explicitly  determines  simultaneous 
equilibrium  on  a  large  number  of  markets.  WorldScan  is  a  multi-sector,  multi-region 

TAXUD/2012/DE/323 

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%PTPLITESMTIEELSIUKBEFRCYATSELUHUNLFICZDEROLVEELTSKDKBGScenario 1Scenario 3aScenario 3b 
100 

model that draws on the GTAP-database (Narayanan et al., 2012), which covers a total 
of  57  sectors  and  129  countries.  As  any  standard  CGE  model,  WorldScan  is  an 
extensive  macroeconomic  model  capable  of  dealing  with  trade  and  trade  protection, 
production,  consumption,  taxation,  labour  and  capital  markets,  government  finances, 
growth and dynamic calibrations.  

One  of  the  main  features  of  CGE  models  is  that  the  behavioural  responses  of  all 
economic  agents  are  directly  built  into  the  model.  In  other  words,  the  model  is 
constructed to automatically take into account how different economic agents react to 
policy shocks. Our CGE structure allows us not only to take the consumption responses 
to VAT rate changes into account, but also to incorporate how these VAT rate changes 
affect  all  relative  prices  in  the  model.  These  relative  price  changes  in  turn  affect 
production, consumption, trade, tax revenues and governmental transfers – among other 
endogenous variables in the model.87 

It  is  important  to  note,  however,  that  standard  CGE  models  are  developed  for  the 
analysis of medium-term questions that involve inter-regional and inter-sectoral effects. 
That is, CGE models are designed to assess the likely macroeconomic consequences of 
policy  changes  that  affect  more  than  one  country  at  the  same  time,  and  can  have 
varying effects on different economic sectors. For instance, CGE models are routinely 
used  in  the  fields  of  international  trade,  economic  integration  and  climate  change.  In 
addition, CGE models are mainly concerned with the “real economy” effects of certain 
economic  policies,  which  include  the  effects  of  policy  shocks  (e.g.  changes  in  taxes 
and/or tariffs) on the efficient allocation of resources between sectors and countries, and 
how  this  affects  sectoral  production,  trade,  employment  and  overall  macroeconomic 
indicators such as GDP and consumption. Since the scope of CGE models is limited to 
medium  to  long-term  effects  of  policy  shocks  on  the  real  economy,  they  do  not 
incorporate features that can assess short-term effects (e.g. how labour markets adjust in 
the short term to policy shocks). In particular, CGE models do not model some features 
that are important for short-term adjustments, like inflation, nominal interest rates and 
nominal  exchange  rates  fluctuations;  therefore,  it  is  not  possible  to  model  monetary 
policy. Although the model includes relative prices, a broadly defined real interest rate, 
real exchange rates and terms-of-trade, these are defined as long-term perfectly flexible 
equilibrium values, and thus are not suitable to account for the short-term variations and 
adjustment paths of the policy shocks.  

87 Such as labour and capital market outcomes, international capital flows and terms-of-trade. 

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Thus in the context of the present study WorldScan is a valuable instrument to analyse 
the medium-term economic impact of a VAT reform that  incorporates the behavioural 
reactions of consumers and producers to VAT rate changes. In particular, it can show 
how  consumption  and  production  changes  within  sectors  (given  that  the  scenarios 
involve  changing  VAT  rates  at  the  sectoral  level),  how  the  EU-wide  reform  affects 
sectoral trade flows and it can forecast the (expected) real effects of the reform on GDP, 
consumption and employment.  

In  what  follows  we  highlight  the  features  of  the  WorldScan  model  that  are  most 
relevant to the VAT scenarios. 

Labour market 

To capture changes in the labour market, we use the WorldScan labour market module 
from  Boeters  and  van  Leeuwen  (2010).  There  are  two  main  labour  types:  low-  and 
high-skill  workers.  Labour  demand  for  both  labour  types  is  determined  by  the 
production process (see below). The main feature of the model extension from Boeters 
and van Leeuwen (2010) is that the labour market features endogenous labour supply, 
unemployment  and  collective  wage  bargaining.  The  model  incorporates  endogenous 
labour  supply  at  two  margins:  participation  and  hours  of  work.  Involuntary 
unemployment is captured through a collective bargaining set-up. The bargained wage 
is set  at a too high level, for which labour supply exceeds demand, causing structural 
unemployment. WorldScan distinguishes five types of households: employed low and 
high  skilled  workers,  unemployed  low  and  high  skilled  workers  and  a  residual 
household  (earning  capital  income  and  receiving  income  transfers).  Households  are 
assumed  to  be  homogeneous  with  respect  to  their  labour-leisure  choice  (intensive 
margin  of  labour  supply),  but  they  differ  with  respect  to  their  participation  decision. 
Non-participating  individuals  face  a  higher  fixed  cost  of  taking  up  work  than 
participating  individuals,  which  makes  taking  up  work  less  attractive  for  them 
(extensive  margin  of  labour  supply).  Of  the  four  worker  households,  employed 
high/low  skilled  workers  receive  wage  income,  and  unemployed  workers  receive 
unemployment benefits. It is important to note that the unemployment benefits included 
in  WorldScan  are  price-indexed,  meaning 
that  unemployed  households  are 
automatically  compensated  for  price  increases  –  for instance, for  final  price increases 
associated with VAT rate increases.  

The labour market module of WorldScan is calibrated to use 2004 as its base year and 
runs until 2020, when the full general equilibrium effects of policy shocks are realized. 

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Moreover, this version of the model uses a particular aggregation of 30 regions and 9 
sectors, for which the labour market data components were calibrated.88 Thus, we have 
sectoral  data  for  each  of  the  27  Member  States  plus  the  USA,  other  OECD  countries 
and the Rest of the World (ROW). The precise sectoral aggregation is shown in Annex 
A.6, together with an intermediate GTAP aggregation of 36-sectors that was required to 
map  the  effective  VAT  rates  for  households  and  non-households  to  the  WS  9-sector 
aggregation. 

Taxation 

From the input-output tables implicit in the GTAP database we have information on the 
consumption  of  intermediate  and  final  goods  and  services.  All  taxes  on  goods  and 
services are captured by effective tax rates, that is, the wedge between producer prices 
(before taxation) and user prices (after taxation), such that: 

 (      

 ), 

  is the user price for sector s,   

  is the market price and   

  is the effective tax 

where   
rate for that sector.  

Final  consumer  prices  and  taxes  are  defined  separately  for  households  and  the 
government,  while  production  (Intermediate  Consumption)  input  prices  and  taxes  are 
estimated as a wedge between production at market and user prices at the sectoral level. 
Thus,  changes  in  the  effective  tax  rate  will  affect  final  consumption  both  directly 
through  the  effective  tax  rate,  but  also  indirectly  through  changes  in  the  tax  rate  of 
intermediate goods and services. 

Consumption and production 

Any  empirically  relevant  consumption  demand  system  needs  to  be  non-homothetic 
(expenditures do not change proportionally with income). It is a well-known fact from 
the empirical consumption literature, that with rising income the budget share spent on 
necessary  goods  becomes  smaller,  while  the  share  spent  on  luxury  goods  becomes 
larger. Therefore, in WorldScan, the household demand for final goods and services is 
specified  as  a  Linear  Expenditure  System  (LES).  This  demand  structure  includes  a 
“subsistence level” or “basic consumption” that is satisfied first. Any remaining budget 

88 We added WorldScan-specific data that are not present in the GTAP database, such as data on the R&D 

input/production structure, and projections on demographic, growth and investment variables. 

Study on VAT rates structure 

 
  
      
 
 
                                                      
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is  then  distributed  across  all  consumption  goods  according  to  their  marginal  budget 
shares.  This  implies  that  the  income  elasticities  are  not  equal  to  one.89  The  demand 
system is calibrated to mimic the empirical consumption structure for each country.  

The production technology is modelled as a nested structure of constant elasticities of 
substitution (CES) functions. Each nest combines production factors that are considered 
to  be  substitutes  for  each  other  (i.e.  national  and  international  intermediate  inputs; 
labour and capital) and have nest-specific elasticities of substitution. A nesting structure 
reflects  views  on  substitution  and  complementarity  between  inputs.  It  allows 
complementarity  between  certain  factors,  but  precludes  complementarity  between 
others. As is standard in CGE models, the same production structure is assumed for all 
sectors  and  regions.  The  values  of  the  substitution  parameters  reflect  the  degree  of 
substitution  between  inputs.  These  values  may  differ  across  sectors,  reflecting  the 
different degrees of substitution of (factor) inputs. There is one representative firm per 
sector within any region.90 

Savings and investment 

Given  the  relevance  of  ageing  in  developed  countries,  WorldScan  uses  an  estimated 
relation between savings, demographics (which include the projected ageing process), 
and  national  income  (cf.  Lejour  et  al.,  2006).  The  estimated  macroeconomic  savings 
rate in the model is thus determined by the demographic composition of the country in a 
given year, and this rate expresses savings as a share of the endogenously determined 
national income.  

Investment is then determined by the fact that demand has to be matched by supply on a 
regional  capital  market.  In  a  closed  economy,  domestic  savings  equal  domestic 
investment. In WorldScan it is assumed that all regions are linked not only by trade in 
goods and services but also by international capital mobility. This implies that regional 
savings and investments can diverge. Therefore, savings have to be equal to investment 
only  at  the  global  level.  In  view  of  the  incomplete  integration  of  regional  capital 

89 In a non-homothetic demand system a 1 % increase in income is not associated with a 1 % increase in all 

consumption categories. 

90 The model cannot capture firm organisational issues, such as the decision to produce inputs internally or 
contract them to another firm. Thus, we are not able to analyse changes in firm size and sectoral coverage 
that may arise from different VAT rates for intermediate inputs. 

TAXUD/2012/DE/323 

 
 
                                                      
104 

markets, we assume that there is imperfect international capital mobility.91 The precise 
bilateral capital barriers are estimated using gravity equations (cf. Lejour et al., 2006), 
and  using  these  estimated  barriers  it  is  possible  to  balance  the  international  capital 
market. 

Government behaviour 

As is common in CGE models, WorldScan does not model the government in a detailed 
way. The main modelling constraint is that it is not feasible – in a CGE framework – to 
endogenously  determine  government  decisions  at  any  given  administration  level: 
regional, national, nor international. In other words, the political process involved in the 
endogenous  decision  to  tax,  consume,  invest  and  borrow  by  governments  is  too 
complex to include in a CGE model. Therefore, the common practice is to assume that 
government-related  variables,  such  as  tax  and  subsidy  rates,  transfer  shares,  and 
regulations  are  fixed  and  the  decisions  to  change  these  variables  are  exogenously 
determined. Moreover, most CGE models specify changes in these variables to simulate 
policy shocks – e.g. changes in tariffs, taxes, subsidies, and/or transfers – and construct 
what-if scenarios. In particular, in our simulations we will exogenously change the EU 
VAT  rates  calibrated  in  the  model  in  order  to  analyse  what  are  the  expected 
macroeconomic  changes  in  each  EU  Member  State  if  the  VAT  rates  were  actually 
changed. 

In WorldScan the government collects taxes on trade, production and consumption. It 
then  spends  tax  income  on  transfers,  subsidies  and  consumption.  Tax  revenue  is 
automatically determined in the model: tax rates are fixed, unless the rates are changed 
as part of the policy shock, and the collected tax revenue is then simply  calculated as 
the  base  (trade,  production  or  consumption)  multiplied  by  the  tax  rate.  The  same 
automatic  mechanism  applies  to  subsidy  payments  (e.g.  with  a  fixed  subsidy  rate, 
subsidy payments change in proportion to the change in the activity level on which the 
subsidy is given).  

There are two types of transfers: general transfers to the residual household (these are 
related to pensions and welfare payments) and unemployment benefits (which are paid 
to both the low- and high-skill unemployed households). We estimate base-year transfer 
levels  from  the  GTAP  database  and  the  model  assumes  that  the  real  value  of  these 

91 Even though the elimination of capital controls and other barriers have stimulated international capital 
mobility  since  the  1980s,  there  are  still  many  international  capital  flow  barriers  that  do  not  allow  the 
equalization of returns on investment between countries. 

Study on VAT rates structure 

 
 
                                                      
105 

transfers  is  maintained  in  every  period.  For  instance,  unemployed  benefits  are  price-
indexed and therefore maintain their real value over time. 

Government  consumption  is  then  determined  as  the  (positive)  difference  between  tax 
revenues and the sum of subsidy payments and transfers.92 Government consumption is 
assigned  by  sector  using  the  base  year  calibrated  shares  (i.e.  the  shares  of  public 
consumption  by  sector)  and  the  same  LES  demand  system  applied  to  household 
consumption, which takes into account relative prices and price elasticities of goods and 
services  provided  by  each  sector.  This  means  that  the  actual  consumption  of  the 
government  and  households  by  sector  is  different  (as  determined  by  initial  base  year 
calibrated  values),  but  that  government  and  households  make  their  consumption 
decisions in the same way. For example, if the relative price of a final good rises due to 
a  tax  increase,  both  the  government  and  households will  substitute  their  consumption 
away from that final good towards relatively cheaper ones. 

Finally, there is no explicit government budget constraint. The government and all five 
households are aggregated into what is called the “regional household”. In WorldScan, 
each EU Member State has a “regional household”, and thus, for each Member State a 
country-wide  budget  constraint  holds:  total  income  of  the  regional  household  equals 
total  expenditure  plus  savings.  This  means  that  when,  for  example,  tax  revenues 
increase  exogenously (as in scenario A following the  elimination of zero and reduced 
VAT  rates),  the  additional  income  is  first  assigned  to  the  regional  household.  This 
income,  in  turn,  is  then  distributed  between  savings  and  consumption  (following  the 
mechanism explained above). The income share that remains for the regional household 
consumption  is  then  used  to  maintain  the  real  (price-adjusted)  value  of  governmental 
transfers and any remaining income is consumed by the government. 

This modelling structure is common to CGE models, and it is usually assumed that in 
the  baseline  the  government’s  budget  is  balanced.93  It  can  then  be  simulated  that  tax 
revenues  remain  equal  to  their  baseline  values  in  the  presence  of  external  shocks,  so 

92 This implies that tax revenues need to be always greater than subsidy payments and transfers. 
93 Alternatively, it can be assumed that the private households of that country hold all domestic public debt. 
So the “regional household” balanced budget can be associated with government deficits or surpluses that 
are exactly compensated by private domestic household holdings of domestic public debt. The distinction 
is  usually  not  made,  because  CGE  models  are  only  concerned  with  medium  and  long-term  effects  of 
policies,  and  not  with  short-term  fluctuations  in  public  deficit/surplus  that  may  affect  inflation  and/or 
interest rates. 

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106 

that a balanced budget is maintained after implementing the scenario. This will be the 
case for the scenarios B and D simulations.  

Baseline scenario and adjustment mechanisms in GE models 

Since  WorldScan  is  a  recursively  dynamic  CGE  model,  first  we  need  to  construct  a 
“baseline” or “business-as-usual” scenario. This provides a time-trend of our variables 
between  the  year  2004  and  2020.  This  baseline  scenario  is  effectively  a  stylized 
extrapolation of the calibrated values in the base-year provided by the GTAP database. 
The baseline is constructed using demographic projections from United Nations and a 
series of assumptions concerning expected growth and investment levels (cf. Lejour et 
al., 2006).  

The  simulations  in  our  scenarios  are  then  “counterfactual”  experiments  on  how  the 
projected  values  of  economic  variables  change  with  respect  to  the  “baseline”  values 
after  a  policy  shock  (the  experiment)  has  been  implemented.  For  our  current  VAT 
scenarios,  which  are  associated  with  a  permanent  policy  shock  (i.e.  a  country/sector-
specific  change  in  VAT  rates  in  2013),  we  only  present  the  difference  between  the 
baseline  values  and  the  scenario  values  for  2020.  We  take  the  2020  changes  as 
representative  of  the  medium-term  effect  of  the  VAT  reforms.  As  explained  before, 
CGE  models  are  not  suitable  for  analysing  short-term  effects  and  short-term 
adjustment, since many of the adjusting mechanisms in the model work unrealistically 
quickly.  For  example,  CGE  models  usually  assume  that  workers  are  highly  mobile 
between sectors and thus, sectoral employment changes can take as little as one year, 
while in reality the adjustment (workers changing jobs to firms in other sectors) usually 
is only fully realized after several years.  

The main adjustment mechanism in any CGE model is provided by changes in relative 
prices.  Most  policy  experiments  that  are  implemented  in  CGE  models  are  directly 
associated with changes in the price of certain goods and services, which in turn will 
change  the  relative  price  of  that  good  or  service  with  respect  to  all  other  goods  and 
services. For instance, an increase in the VAT rate in a particular sector in a particular 
country will increase the final price paid by consumers of the good or service produced 
by that sector in that country. In turn, this will increase its relative price. Based on the 
underlying  neoclassical  micro-foundations  of  the  model,  when  consumers  face  higher 
relative prices, they will substitute away to other goods and services and purchase more 
of relatively cheaper goods and services (i.e. the substitution effect). The price increase 
will  also  decrease  their  real  income  and  therefore  also  reduce  the  consumption  of  all 

Study on VAT rates structure 

 
 
107 

goods  and  services  (the  income  effect). The exact substitution  and  income  effects are 
driven by the underlying parameters in the LES  consumption function: the elasticities 
of substitution, subsistence levels and initial consumption shares.94 

However, in a general equilibrium model this is only the initial adjustment effect, which 
is  followed  by  second-round  adjustments  that  are  necessary  to  bring  all  markets  into 
equilibrium  again.  Using  our  example  above,  the reduction in the  consumption of the 
good that has a higher VAT rate will decrease the domestic production (or imports) of 
that  good.  This  in  turn  will  require  fewer  workers,  capital  and  intermediate  inputs  to 
produce the good, and this implies that workers  have to move to other sectors, which 
can  also  be  associated  with  changes  in  wages,  and  overall  employment  levels. 
Moreover, the change in the relative price of that particular good can also have effects 
on  the  amount  of  the  good  that  is  exported  and/or  imported.  The  precise  changes  in 
trade  are  related  to  comparative  advantages  (differences  in  technology,  productivity) 
and trade barriers between countries. 

In  our  VAT  reform  scenarios,  where  several  sector/country-specific  VAT  rates  are 
changed  simultaneously,  the  relative  prices,  all initial  adjustments  and  the  subsequent 
general equilibrium adjustments are quite complex. The main function of a CGE model 
as  WorldScan  is  to  have  a  reliable  and  micro-founded  framework  that  can  mix  the 
different specifications of the model to obtain the medium to long-term impact of the 
policy shock.  

3.2 

Implementation of status quo and reform scenarios 

In  order  to  analyse  the  economic  impact  of  changes  in  the  VAT  rates,  a  series  of 
adjustments have to be made to the core WorldScan model. First, we need to calibrate 
the  effective  VAT  rates  provided  for  households  and  non-households  into  the  current 
tax rates in the WorldScan model. In particular, these are: 
  VAT paid by households by consumption category using the UN COICOP (codes 
at different aggregation levels (i.e. 2, 3, and 4-digit level)). The application of the 
VAT  rates  follows  information  provided  by  TAXUD  (European  Commission, 
2011a) and national legislations. 

94  Note  that  since  the  substitution  and  the  income  effect  reduce  the  consumption  of  that  good,  then  the 
expenditure  share  of  that  good  relative  to  total  income  will  be  reduced.  Therefore,  the  percentage 
reduction in real income associated with the VAT rate increase in a particular good is usually less than 
the  percentage  VAT  rate  increase.  For  example,  a  10 %  VAT  rate  increase  in  a  particular  good,  will 
usually represent a real income reduction of less than 10 %. 

TAXUD/2012/DE/323 

 
 
                                                      
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  VAT paid by non-households by production category using the EUROSTAT CPA 
codes at the 2-digit level. The application of the VAT rates is based on information 
provided by TAXUD and IBFD.95  

Unfortunately,  there  exists  no  direct  link  between  the  57  GTAP  sectors  with  the 
COICOP or CPA-2002 classifications. Thus, we start by calibrating the VAT rates with 
the following procedure: 
1.  We  map  the  COICOP  and  the  CPA-2002  classification  codes  into  a  36-GTAP 
sectoral  aggregation.  These  36  sectors  are  more  easily  mapped  than  the  total  57 
sectors in GTAP, in particular, with respect to the production sectors from CPA. 
2.  We then map these 36 sector rates to the 9 sectors we use in WorldScan. Using the 
consumption/production  shares  by  sector  we  obtain  weighted  average  VAT  rates 
for our final 9 sectors.  

3.  We  then  need  to  distinguish  these  sectoral  VAT  effective  tax  rates  from  other 
  (the current 

consumption taxes (e.g. excise taxes on fuel, alcohol and tobacco) in   
total tax rate in GTAP). This implies an equation for final consumption prices:  

  is the VAT average effective tax rate, and    

  will then include all other 

 (      

 ) 

where   
taxes. 

4.  From  the  analysis  on  households  and  non-households  we  know  about  effective 
VAT  rates  for  2011  and  for  scenario  1  (all  taxable  supplies  taxed  at  the  standard 
     )  with  the 
rate).  We  then  compare  these  2011  VAT  9-sector  rates  (  
consumption  tax  rates  for  households  and  non-households  from  GTAP  (      
 ). Since these GTAP rates (T) implicitly include VAT plus other taxes (  
need to separate the VAT component from other consumption taxes in GTAP.  

 ), we 

5.  So we calibrate the tax rates using this procedure: 

a.    

        if        

implicit VAT rates in GTAP in 2004 are equal to the rates in 2011 (  
and thus there is no change in VAT rates between 2004 and 2011. 

     .  In  this  case  we  are  assuming  that  the 
     ), 

b.  However,   

a two-stage adjustment. First, we estimate the VAT rate differential:     
           and  we  assume  that    

      is not always smaller than T. Thus, in these cases we have 
 = 
        Then,  in  year  2004  we  have  that 
 .  The  implicit 
GTAP rates in 2004 are lower than the 2011 rates. The second step is then 
      and the rates in 
to adjust the rates in year 2011 so we have       

 ,  or  equivalently    

95  For  a  description  on how  effective  VAT  rates  were  obtained  both  for  households  and  non-households 

please refer to section 2.1. 

Study on VAT rates structure 

 
  
      
      
   
  
          
  
      
           
          
           
      
                                                      
109 

WorldScan from 2011 onwards are calibrated to the values provided by our 
partners. 

c.  Then we run WorldScan with this baseline VAT rates for the period 2004-
2020,  and these  outcomes  are taken as our  reference baseline  values. The 
scenarios  – explained below  – are simulations where changes in the VAT 
rates (  

 ) are applied in the year 2013. 

It is important to note that in the GTAP database most sectors in the EU-27 countries 
have  negative  production  tax  rates  (i.e.  subsidies),  while  only  some  country-sector 
combinations have positive rates (e.g. the energy sector). This contrasts with the final 
consumption  effective  rates  in  GTAP  that  are  generally  in  line  with  the  VAT  rates 
applied in the EU-27. We therefore assume that the GTAP database includes no explicit 
VAT  taxes  for  intermediate  inputs  and  the  VAT  rates  are  applied  exclusively  to  final 
consumption. Hence, the VAT rates from the GTAP data at the final consumption stage 
are, in principle, a weighted average of the different VAT rates for intermediate inputs 
in the whole production supply chain together  with the VAT rates applied to the final 
sectoral output.  

We simulate five reform scenarios where we abolish zero and reduced rates (resulting 
in all taxable supplies being taxed at the standard rate). Depending on the scenario, the 
standard  rate  either  remains  the  same  or  decreases  such  that  VAT  revenues  remain 
constant.  However,  since  we  take  into  account  exempted  goods  and  services  when 
calculating  sector-specific  (effective)  VAT  rates,  sector-specific  VAT  rates  can  differ 
from the single standard rate. In other words, the sector-specific VAT rates depend on 
the relative importance of exempted sub-sectors and therefore, rates vary by sector. 

We  first  calibrate  the  sector-specific  VAT  rates  (  
country, and then run five scenarios96: 
  Scenario A: Zero and reduced rates are increased to the level of the standard rate. 
   in  2013  to  the  new  sector/country-specific  VAT  rates,  taxing  all  taxed 

We  set    
supplies at the standard rate, but taking into account exemptions97  

 )  for  the  base  scenario  for  every 

96 Note that scenarios A and B are similar, but not identical, to scenarios 1 and 2 in previous sections. The 
CGE model by construction already includes the behavioural reaction of consumer and producers to the 
tax  changes,  and  therefore,  the  results  of  both  sets  of  scenarios  are  not  directly  comparable  and  are 
conceptually different. Specifically, note that the additional tax revenues in scenario A are automatically 
transferred back in the economy, while scenario 1 does not specify how the additional funds are used.  
97  Recall  that  the  unemployment  benefits  included  in  WorldScan  are  price-indexed  and  automatically 
compensate unemployed households for the price increases associated with higher VAT rates. Therefore, 

TAXUD/2012/DE/323 

 
 
 
                                                      
110 

  Scenario  B:  We  abolish  zero  and  reduced  rates  and  calibrate    

   to  find  a  new 
standard rate that is budget neutral – after behavioural responses – for each EU-27 
  such 
Member State. To achieve this we endogenise the sector-specific VAT rate   
that it is budget neutral: the total tax revenue from the government is kept constant 
at its baseline value.98  

  Scenario  C:  Abolishing  the  zero  and  reduced  rates  and  tax  all  (non-exempt) 
supplies  at  the  standard  rate  is  expected  to  reduce  the  administrative  burden 
associated with VAT collection. In this scenario we explore the economic effects of 
simplifying  the  VAT  compliance  and  administration  associated  with  the  use  of 
country-specific standard VAT rates on all taxed supplies. The expected efficiency 
gains associated with a simplified VAT rates system are then applied to the same 
VAT rates changes as in scenario B. 

  Scenario D: The VAT increase caused by the abolition of zero and reduced rates is 
compensated by an endogenously calculated decrease in the capital-investment tax 
that assures that overall tax revenue remains constant as in scenario B.99 

  Scenario E: The same as in Scenario A, but the additional tax revenues associated 
with  the  VAT  increase  are  transferred  to  both  low-skilled  households  (employed 
and unemployed). 

3.3  Results 

Scenario A 

To implement scenario A, we substitute the VAT rates previously calibrated until 2011 
(which  still  include  zero  and  reduced  rates)  for  the  sector-  and  country-specific  VAT 
rates calibrated without zero and reduced rates in 2013, and run the WorldScan model 
until 2020. However, it is important to keep in mind that sector-specific VAT rates will 
still differ among sectors due to VAT exemptions. 

scenario  A  is  more  related  to  scenario  3  than  to  scenario  1  in  the  static  analysis.  The  definitions  of 
households, however, are different in both scenarios and thus, they are not entirely comparable. 

98 Note that this is more intricate than just keeping the VAT revenues constant. Our CGE structure allows 
us not only to take the consumption responses into account, but also other tax revenues are affected. In 
addition, we used an alternative specification where the total tax revenue is kept constant as a percentage 
of real GDP, but our results do not change. 

99 As with scenario B, endogenous means that the model automatically finds the tax level (in this case the 
capital-investment tax) that balances the budget by maintaining tax revenues in the scenario equal to the 
baseline values. 

Study on VAT rates structure 

 
                                                                                                                                              
111 

Once we apply the new VAT rates in 2013 we find that average VAT rates increase in 
all  countries,  in  particular  for  the  following  sectors:  agriculture  (AGO),  low-tech 
manufacturing  (LTM,  mainly  through  increases  in  the  rates  on  processed  food), 
transport  (TRA,  for  non-households)  and  other  services  (OSR);  see  the  first  four 
columns in Table 28.100  

Table 28: Scenario A, changes in VAT rates and sectoral output, simple EU-27 averages 

Households 

Non- households 

Sector 

VAT 
baseline 

Agric. & mining 
Energy 
Low tech. manuf. 
Medium-low tech. 
Medium-high tech. 
High tech. manuf. 
Transport 
Commercial serv. 
Other services 
Source: Own estimations using the WorldScan model. 

11.60% 
19.60% 
15.70% 
20.70% 
20.70% 
20.70% 
19.30% 
18.60% 
9.30% 

VAT 
scenario A 
20.70% 
20.70% 
20.70% 
20.70% 
20.70% 
20.70% 
20.50% 
18.80% 
14.00% 

VAT 
baseline 

10.20% 
18.90% 
16.10% 
19.80% 
18.50% 
19.90% 
8.40% 
15.20% 
5.40% 

VAT 
scenario A 
19.00% 
19.90% 
19.80% 
19.90% 
19.80% 
19.90% 
12.60% 
16.20% 
6.90% 

Output 
share 
change 

-0.07% 
0.00% 
-0.22% 
0.01% 
0.06% 
0.03% 
-0.02% 
0.11% 
0.10% 

This pattern of sectoral VAT increases is reflected by changes in sectoral output. In the 
last column of Table 28, we present the medium-term changes in the sectoral shares of 
total  output  between  the  baseline  and  scenario  A  in  the  EU-27  average  (Table  30 
contains  sectoral  output  share  changes  by  Member  state).101  We  observe  that  those 
sectors  for  which  VAT  rates  increase  the  most  are  those  sectors  that  experience 
decreases  in  relative  terms.  The  exception  is  the  sector  other  services  (OSR),  which 
increases its relative production share even though VAT taxes for this sector rise. This 
is  caused  by  the  general  equilibrium  effects  of  the  tax  shock:  the  reduction  of 
production in one sector releases production factors that are then used by other sectors, 
in accordance with the changes in relative prices and ultimately in sector profitability 
(i.e. the interaction of relative changes in input costs and final prices). For instance, the 
decrease  in  the  relative  output  of  the  low  tech  manufacturing  sector  (LTM;  mainly 

100 Due to the dimensions of the data (27 countries and 9 sectors) we only present simple EU-27 averages 
in Table 28. Moreover, we also show sectoral output share changes by Member State for scenarios A to 
D.  Additional  Country/sector  specific  results  for  each  scenario  are  available  in  the  scenario  specific 
spreadsheet annex (sheet “All”). 

101 Note that these changes in output shares are percentage point differences in production composition and 

all changes must sum up to zero, i.e. the changes must exactly compensate each other. 

TAXUD/2012/DE/323 

 
                                                      
112 

caused by changes in the production of processed food) frees resources, and therefore 
output  increases  in  other  sectors  as  those  resources  are  re-employed,  in  this  case  by 
services  sectors  (OCS  and  OSR).  However,  these  changes  in  production  composition 
remain relatively small (less than a quarter of a percentage point decrease for LTM, for 
instance). 

The changes in the main economic indicators for scenario A are presented in Table 29. 
First, we analyse the EU-27 as a whole and we observe that following the abolition of 
zero  and  reduced  rates,  overall  macroeconomic  indicators  experience  relatively  small 
changes. For instance, GDP decreases by around a third of a percentage point.102 These 
changes  in  GDP  are  in  line  with  reductions  in  consumption,  which  we  would  expect 
following an increase in a consumption tax. Following the GDP decrease, employment 
decreases  slightly  with  low-skill  workers  losing  more  jobs  than  high-skill  workers. 
Unemployment rates (see the spreadsheets) remain unchanged, while changes in labour 
demand  are  also  reflected  in  a  small  increase  in  wage  inequality  (low-skill  wages 
decline relative to high-skill wages). Finally, we observe that the abolition of zero and 
reduced rates also reduces international trade. The changes in relative prices triggered 
by the new VAT rates, which initially change the composition of sectoral production, 
are also responsible for changes in trade flows.  

These  overall  changes  in  the  EU-27  are  broadly  reflected  by  the  changes  for  each 
individual  Member  State,  with  some  exceptions.  GDP  decreases  for  most  countries, 
with  the  exception  of  Cyprus  and  Latvia.  Consumption  decreases  for  all  countries 
except  for  Latvia.  Trade  volumes  also  decline  for  all  countries  but  Hungary.  Finally, 
employment decreases in all countries. 

In  general,  economic  activity  declines  due  to  the  tax  increase  associated  with  the 
abolition of zero and reduced rates. On the other hand, the very few exceptions can be 
explained  by  general  equilibrium  adjustments  where  initial  decreases  in  consumption 
and GDP can be later reversed by the changes in output composition and increases in 
trade  volumes  within  the  EU-27  and  with  its  main  partners.  We  would  expect  that  a 
more  uniform  VAT  would  induce  a  more  efficient  allocation  of  resources  towards 
productive  sectors,  but  the  changes  in  relative  prices  can  also  create  export 

102  Since  the population  data  remain  unchanged  in  both  the  baseline  and  the  reform  scenario,  percentage 
changes in GDP and GDP per capita are equivalent. The same applies to consumption and consumption 
per capita. 

Study on VAT rates structure 

 
 
 
                                                      
113 

in 

this 

that 

opportunities  as  well  as  more  import  competition  for  particular  sectors.103  However, 
note 
into  account  potential 
administrative/compliance efficiency gains that are expected from the introduction of a 
uniform VAT rate  on all taxed supplies. These administrative efficiency gains will be 
analysed in scenario C.  

scenario  we  are  not 

taking 

To sum up, the abolition of zero and reduced VAT rates in each Member State should 
induce  a  less  distorted  sectoral  resource  allocation.  At  the  same  time,  however,  the 
overall  tax  revenues  increase,  and  this  results  in  less  economic  activity.  Thus,  it  is 
interesting  to  analyse  what  happens  in  scenario  B  when  zero  and  reduced  rates  are 
abolished  but  in  addition  the  standard  rate  is  lowered  such  that  tax  revenues  remain 
constant.  

103 For example, the country-specific increases in the different sector-specific VAT rates can result (as part 
of  the  general  equilibrium  mechanism)  in  different  relative  price  changes  for  a  particular  sector  in  two 
different member countries. This price change will in turn make it more attractive for the country with the 
lower  relative  price  to  export  to  the  country  with  the  higher  relative  price  in  that  particular  sector. 
Therefore, differences in relative prices between countries can result in changes in trade flows. 

TAXUD/2012/DE/323 

 
 
                                                      
Table 29: Scenario A – percentage changes in main economic indicators, relative changes 
with respect to baseline values in 2020 

114 

y
r
t
n
u
o
C

P
D
G

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.62 
-0.02 
-0.14 
-0.07 
-0.27 
-0.07 
-0.38 
-0.32 
-0.60 
-0.26 
-0.14 
0.01 
0.29 
-0.24 
-0.50 
-0.40 
-0.32 
-0.24 
-0.40 
-0.54 
-1.09 
-0.07 
-0.32 
-0.04 
-0.54 
-0.33 
-0.54 

n
o
i
t
p
m
u
s
n
o
C

-0.95 
-0.06 
-0.56 
-0.13 
-0.49 
-0.16 
-0.70 
-0.91 
-0.91 
-1.10 
-0.43 
-0.27 
0.00 
-0.34 
-0.87 
-0.69 
-0.63 
-0.53 
-0.98 
-1.08 
-1.64 
-0.26 
-0.79 
-0.13 
-0.86 
-0.54 
-0.89 

e
m
u
l
o
v

t
r
o
p
x
E

-0.90 
-0.26 
-0.35 
-0.27 
-0.59 
-0.23 
-1.00 
-0.78 
-0.96 
-0.26 
-0.67 
-0.33 
-0.57 
-0.26 
-0.26 
0.10 
-0.63 
-0.82 
-0.35 
-1.20 
-2.15 
-0.20 
-0.76 
-0.01 
-0.47 
-0.55 
-0.94 

e
m
u
l
o
v
t
r
o
p
m

I

-0.65 
-0.30 
-0.25 
-0.38 
-0.46 
-0.27 
-0.36 
-0.36 
-0.58 
-0.19 
-0.49 
-0.34 
-0.31 
-0.27 
-0.15 
0.07 
-0.52 
-0.71 
-0.13 
-0.58 
-0.94 
-0.28 
-0.48 
-0.10 
-0.23 
-0.38 
-0.43 

t
n
e
m
y
o
l
p
m
E

l
a
t
o
t

d
e
l
l
i
k
s
-
w
o
L

d
e
l
l
i
k
s
-
h
g
i
H

-0.71 
-0.01 
-0.38 
-0.05 
-0.42 
-0.06 
-0.48 
-0.54 
-0.72 
-0.68 
-0.28 
-0.20 
-0.01 
-0.11 
-0.62 
-0.45 
-0.64 
-0.42 
-0.63 
-0.81 
-0.91 
-0.08 
-0.30 
-0.06 
-0.64 
-0.42 
-0.57 

-0.90 
-0.01 
-0.48 
-0.06 
-0.61 
-0.07 
-0.60 
-0.66 
-0.96 
-0.80 
-0.37 
-0.28 
-0.04 
-0.12 
-0.74 
-0.48 
-0.89 
-0.56 
-0.69 
-1.11 
-1.10 
-0.08 
-0.37 
-0.08 
-0.74 
-0.54 
-0.75 

-0.48 
0.00 
-0.21 
-0.04 
-0.17 
-0.04 
-0.24 
-0.30 
-0.38 
-0.51 
-0.15 
-0.04 
0.05 
-0.10 
-0.48 
-0.41 
-0.29 
-0.27 
-0.52 
-0.29 
-0.47 
-0.08 
-0.17 
-0.03 
-0.50 
-0.28 
-0.32 

f
o
%

s
a
w
o
l

e
g
a
W

l
l
i
k
s
-
h
g
i
h
e
g
a
w

-0.23 
-0.02 
-0.42 
-0.06 
-0.32 
-0.05 
-0.75 
-0.21 
-0.23 
-0.59 
-0.39 
-0.58 
-0.35 
-0.07 
-0.22 
0.17 
-1.13 
-0.55 
-0.32 
-0.79 
-0.69 
0.05 
-0.44 
-0.03 
-0.27 
-0.48 
-0.49 

EU-27 
Source: Own estimations using the WorldScan model.  

-0.69 

-0.37 

-0.71 

-0.45 

-0.49 

-0.65 

-0.26 

-0.36 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
115 

Table 30: Scenario A – percentage changes in sectoral output share, relative changes with 
respect to the baseline values in 2020 

y
r
t
n
u
o
C

,
l
i
o

,
e
r
u
t
l
u
c
i
r
g
A

s
l
a
r
e
n
i
m

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.03 
-0.04 
0.00 
-0.24 
-0.07 
-0.03 
-0.03 
-0.02 
-0.04 
-0.07 
-0.12 
-0.03 
-0.10 
-0.07 
-0.05 
-0.01 
-0.08 
-0.29 
-0.06 
-0.12 
-0.13 
-0.01 
-0.01 
-0.03 
-0.08 
-0.04 
-0.04 

s
r
e
i
r
r
a
c

y
g
r
e
n
E

0.01 
0.01 
0.00 
0.02 
0.02 
0.00 
0.00 
0.00 
0.02 
-0.01 
0.00 
0.00 
-0.01 
-0.01 
-0.02 
0.01 
0.00 
-0.07 
0.02 
0.03 
-0.01 
0.01 
0.00 
0.00 
0.01 
0.01 
0.00 

.

h
c
e
t

w
o
L

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t

w
o
l
-

m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
h
-
m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
H

s
e
r
u
t
c
a
f
u
n
a
m

-0.12 
-0.26 
-0.04 
-0.15 
-0.24 
-0.08 
-0.24 
-0.12 
-0.24 
-0.27 
-0.32 
-0.08 
-0.23 
-0.30 
-0.18 
-0.07 
-0.15 
-0.23 
-0.25 
-0.50 
-0.53 
-0.13 
-0.08 
-0.33 
-0.27 
-0.25 
-0.32 

0.03 
-0.01 
0.02 
0.01 
0.02 
0.01 
0.00 
0.02 
0.05 
0.01 
0.01 
0.02 
0.01 
0.02 
0.03 
0.02 
0.00 
0.00 
0.00 
0.03 
-0.02 
0.04 
0.02 
0.01 
0.02 
0.01 
-0.01 

0.11 
0.07 
0.02 
0.09 
0.09 
0.05 
0.05 
0.05 
0.05 
0.06 
0.02 
0.11 
0.21 
0.04 
0.05 
0.05 
0.03 
-0.04 
0.05 
0.13 
0.01 
0.10 
0.06 
0.06 
0.06 
0.09 
0.03 

0.02 
0.00 
0.00 
0.02 
0.02 
0.00 
0.01 
0.01 
0.05 
0.01 
0.01 
0.03 
0.06 
0.01 
0.01 
0.01 
0.02 
0.33 
0.00 
0.01 
0.01 
0.01 
0.02 
0.02 
0.00 
0.00 
0.00 

l
a
i
c
r
e
m
m
o
C

s
e
c
i
v
r
e
s

d
n
a
t
n
e
m
n
r
e
v
o
G

s
e
c
i
v
r
e
s

r
e
h
t
o

-0.02 
0.15 
0.01 
0.13 
0.12 
0.04 
0.07 
0.05 
0.14 
0.17 
0.23 
0.08 
0.02 
0.24 
0.04 
0.03 
0.19 
0.01 
0.06 
0.21 
0.30 
0.04 
0.00 
0.12 
0.23 
0.10 
0.16 

0.00 
0.09 
0.00 
0.15 
0.04 
0.02 
0.17 
0.01 
0.00 
0.12 
0.23 
-0.15 
0.07 
0.09 
0.16 
0.00 
0.00 
0.33 
0.21 
0.21 
0.37 
-0.06 
-0.01 
0.17 
0.03 
0.17 
0.20 

t
r
o
p
s
n
a
r
T

0.01 
-0.01 
0.00 
-0.02 
-0.01 
0.00 
-0.01 
0.00 
-0.04 
-0.03 
-0.05 
0.02 
-0.02 
-0.01 
-0.04 
-0.02 
0.00 
-0.04 
-0.02 
-0.01 
0.00 
0.00 
-0.01 
-0.01 
-0.01 
-0.09 
-0.03 

0.00 
EU-27 
 Source: Own estimations using the WorldScan model.  

-0.07 

-0.22 

0.01 

0.06 

0.03 

-0.02 

0.11 

0.10 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
  
116 

Scenario B 

To  simulate  scenario  B  in  WorldScan  we  first  need  to  change  the  core  model  to 
introduce a standard VAT rate on all taxed supplies that is endogenous while total tax 
revenues  are  fixed  at  the  baseline  levels.  However,  we  still  have  different  sector-
specific  VAT  rates,  which  reflect  deviations  from  the  standard  rate  due  to  the  sub-
sectors  that  are  VAT  exempted.  In  particular,  we  use  the  deviation  of  each  sectoral 
VAT rate from the standard rate in scenario A as a measure of these sectoral deviations 
in  scenario  B.  Previously,  the  VAT  rate  was  exogenous  and  total  tax  revenues  were 
endogenously determined by changes not only in the VAT rates, but also by changes in 
economic activity.104 

Table  31  compares  the  estimated  new  revenue-neutral  standard  VAT  rates  with  the 
actual standard rates and the new standard rates as estimated in scenario 2 (chapter 2). 
As  expected,  the  revenue-neutral  rates  estimated  by  WorldScan  are  lower  than  the 
actual standard rates. The extent of the reduction is related to the initial distribution of 
VAT rates across country-specific sectors (i.e. countries with effective VAT rates more 
distant from the actual standard rate can afford to have lower revenue-neutral standard 
rates  when  zero  and  reduced  rates  are  abolished)  and  the  general  equilibrium  effects 
that adjust the final VAT rates to incorporate changes in economic activity. 

104 Note that our endogenously estimated VAT rate assures that  total tax revenue is equal to the baseline 

value and not only VAT revenues. 

Study on VAT rates structure 

 
                                                      
117 

Table 31: Comparison of standard VAT rates (as of 2011), revenue neutral standard rates 
as obtained in scenario 2 and revenue neutral standard rates as obtained in scenario B 

Country 

Actual standard 
VAT rate 

Scenario 2 
revenue-neutral 
VAT rate 

Scenario B 
revenue-neutral 
VAT rate 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

21.0% 
20.0% 
20.0% 
25.0% 
19.0% 
20.0% 
23.0% 
18.0% 
19.6% 
21.0% 
20.3% 
15.0% 
22.0% 
21.0% 
15.0% 
25.0% 
18.0% 
19.0% 
20.0% 
23.0% 
23.0% 
24.0% 
20.0% 
20.0% 
23.0% 
25.0% 
20.0% 

EU-27 

20.70% 

16.9% 
20.0% 
17.5% 
24.7% 
16.8% 
19.4% 
18.9% 
12.6% 
16.1% 
15.2% 
15.1% 
12.1% 
20.7% 
20.6% 
12.5% 
22.1% 
13.5% 
16.1% 
16.8% 
17.0% 
17.2% 
22.9% 
16.3% 
19.8% 
20.2% 
21.6% 
16.3% 

17.7% 

17.8% 
20.0% 
16.5% 
24.8% 
17.2% 
19.7% 
14.5% 
15.0% 
16.9% 
16.6% 
18.2% 
12.0% 
18.9% 
20.4% 
11.2% 
22.9% 
14.2% 
16.7% 
15.9% 
17.4% 
17.3% 
23.0% 
16.5% 
19.8% 
19.5% 
22.4% 
15.8% 

17.8% 

Source: WIOD, EUROSTAT, IBFD, European Commission, Own Submissions and own calculations, own 

estimations using the WorldScan model.  

TAXUD/2012/DE/323 

  
 
 
 
118 

The  revenue-neutral  rates  estimated  using  WorldScan  are  in  general  comparable  to 
those estimated for the static analysis (section 2.2). The differences can be explained by 
the fact that WorldScan estimates VAT rates that make  all tax revenues equivalent to 
the baseline values and not only the VAT revenues. In addition, WorldScan takes into 
account the general equilibrium effects of changes in economic activity that affect the 
revenues  of  other  taxes  plus  those  of  the  VAT  revenues  itself.  These  effects  include 
changes  in  overall  consumption  and  production, sector-specific  consumption,  changes 
in  trade  flows  between  Member  States  and  other  trading  partners.  All  the  changes  in 
these variables affect tax revenues in different ways. The different level of aggregation 
used in their estimation can explain additional differences between both rates. 

Using these revenue-neutral VAT rates we find that the changes in sectoral production 
composition are very similar to those from scenario A (see Table 32, Table 34 contains 
output share changes disaggregated by Member State). The main difference is that the 
reduction  in  the  production  share  of  the  low-tech  manufacturing  sector  is  less 
pronounced  than  in  scenario  A  (-0.15%  instead  of  -0.22%)  and  the  service  sectors 
develop  somewhat  differently.  The  share  of  commercial  services  expands  by  0.15% 
(instead  of  0.11%  in  scenario  A),  at  the  expense  of  a  decrease  in  the  share  of  other 
services by -0.08% (in scenario A, this sector increased by 0.05). This relative decrease 
in  the  service  sectors  reflects  a  more  efficient  resource  allocation  caused  by  the 
abolition  of  zero  and  reduced  rates,  accompanied  by  a  simultaneous  reduction  in  the 
standard rate. This more efficient resource allocation changes the relative importance of 
the various sectors. 

The changes in the main economic indicators for scenario B are presented in Table 33. 
For the EU-27 as a whole we see that the new revenue-neutral standard VAT rates still 
reduce  consumption,  but  to  a  much  lesser  extent  than  in  scenario  A.  GDP  remains 
unchanged, while we saw a small decrease in scenario A. The main difference between 
both  scenarios,  however,  is  that  with  the  new  standard  VAT  rates  employment 
increases,  and  now  employment  gains  are  larger  for  low-skilled  than  for  high-skilled 
workers. This relatively large increase in demand for low-skilled labour is also reflected 
in a reduction in wage inequality, as the wages of low skilled workers increase relative 
to  high  skilled  workers.  Unemployment  is  again  unchanged  (see  the  spreadsheets). 
Finally, export volumes expand while imports decrease.  

Study on VAT rates structure 

 
 
 
 
119 

Table  32:  Sectoral  output  share  for  each  scenario  for  the  EU-27  as  a  whole,  percentage 
changes with respect to the baseline 

Sector 

Agric. & mining 
Energy 
Low tech. manuf. 
Medium-low tech. 
Medium-high tech. 
High tech. manuf. 
Transport 
Commercial serv. 
Other services 

Scenario 
A 

Scenario 
B 

Scenario 
C 

Scenario 
D 

Scenario 
E 

-0.07 
0.02 
-0.22 
0.02 
0.07 
0.03 
-0.01 
0.11 
0.05 

-0.06 
0.01 
-0.15 
0.02 
0.09 
0.01 
0.00 
0.15 
-0.08 

-0.06 
0.00 
-0.15 
0.02 
0.09 
0.01 
0.00 
0.15 
-0.08 

-0.16 
-0.05 
-0.34 
0.05 
0.28 
0.51 
-0.15 
0.23 
-0.36 

-0.07 
0.02 
-0.22 
0.02 
0.07 
0.03 
-0.01 
0.11 
0.05 

Source: Own estimations using the WorldScan model. 

With  respect  to  the  country-specific  results,  we  observe  that  changes  in  economic 
activity are more heterogeneous now than in scenario A. Very few countries experience 
the same macroeconomic changes following the VAT reform as we observe in the EU-
27 as a whole. For some countries there are increases in GDP and consumption, while 
others experience the opposite effects.  

Even  though  the  expected  allocation  efficiencies  from  a  revenue  neutral  abolition  of 
zero  and  reduced  VAT  rates  are  not  realized,  overall  EU-27  macroeconomic  values 
remain basically unchanged. This result reflects general equilibrium effects associated 
with  the  changes  in  relative  prices,  not  only  internally  but  also  with  respect  to  each 
country’s  main  trading  partners  (most  of  which  are  within  the  EU-27).  Although  the 
VAT rate changes from scenario B harmonise sectoral VAT rates  within EU Member 
States, there are still big differences between Member States, from a new standard VAT 
rate of almost 25 % in Denmark to 11 % in Luxembourg (see Table 31). For instance, a 
country  that  initially  experiences  an  increase in  GDP  due  to  the  efficiency  gains  of  a 
uniform VAT system can in later rounds experience a reduction of sectoral output due 
to an increase in import competition from diverging international sectoral prices within 
the  EU-27.  Since  the  sectoral  output  and  overall  GDP  changes  are  almost  zero,  the 
results can be driven by changes in production in a few or one single sector. 

For example, Spain experiences a reduction in the relative producer prices with respect 
to EU-27 producer prices for almost all sectors (results in attached spread sheet files). 

TAXUD/2012/DE/323 

 
 
 
120 

Thus,  the  overall  changes  in  relative  prices  associated  with  the  general  equilibrium 
effects provide them with an international comparative advantage and this is reflected 
by an increase in exports of 0.2 %, which in turn spurs GDP that increases by 0.13 %. 
Moreover,  the  changes  in  relative  prices  that  affect  trade  are  also  reflected  by  the 
changes  in  the  sectoral  production  and  consumption  structure.  In  the  case  of  Spain, 
decreases in the relative price of agriculture and other services are directly reflected by 
a decrease in the production share of those sectors. On the contrary, France experiences 
an increase in relative producer prices with respect to EU-27 prices and this yields an 
export  decrease  of  0.15 %  and  a  GDP  fall  by  0.17 %.  At  the  sectoral  level  this  is 
translated  into  different  export  and  import  changes  between  sectors.  For  instance, 
France  is  exporting  relatively  more  agriculture  and  low-tech  manufactures,  and  less 
medium-, medium-high- and high-tech manufactures.  

Therefore,  the  potential  gains  from  an  internally  less  distorted  resource  allocation 
following the introduction of a uniform VAT system within each Member State can be 
offset by the effect of an internationally (or within-EU) inefficient allocation due to the 
still  divergent  VAT  rates  between  countries.105  Since  the  VAT  rates  in  all  sectors  are 
changing  in  scenario  B  (first  by  imposing  a  standard  rate  for  those  sectors  that 
previously had zero or reduced rates, and second, by changing the standard rate to make 
the VAT reform revenue-neutral), the changes in relative prices in scenario B are larger 
than those in scenario A (where the VAT rates did not necessarily change in sectors that 
were  not  directly  affected  by  zero  or  reduced  rates).  Nevertheless,  as  expected,  the 
results from scenario B are more favourable than those from scenario A. 

105  For  instance,  a  previous  study  to  TAXUD  (IFS  et  al.,  2011),  using  WorldScan,  found  sizeable  and 
positive GDP gains when VAT rates between EU Member States were harmonized. Divergent VAT rates 
between Member States result in significant distortions in relative input and production prices that affect 
the competitiveness between firms in different EU countries since there are no  internal frontiers within 
the  single  European  market.  In  addition,  divergent  VAT  rates  also  result  in  higher  compliance  and 
administrative costs for firms that operate in more than one EU country. 

Study on VAT rates structure 

 
 
                                                      
121 

Table 33: Scenario B – percentage changes in main economic indicators, relative changes 
in 2020 with respect to baseline values  

y
r
t
n
u
o
C

P
D
G

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

0.02 
-0.01 
0.12 
-0.06 
-0.02 
0.00 
0.27 
0.13 
-0.17 
-0.04 
0.09 
0.36 
1.02 
-0.16 
0.20 
-0.18 
0.00 
-0.03 
0.07 
0.06 
0.36 
0.05 
0.24 
-0.03 
-0.02 
0.07 
-0.04 

n
o
i
t
p
m
u
s
n
o
C

0.03 
0.01 
0.07 
-0.05 
-0.01 
0.00 
-0.19 
0.09 
-0.18 
-0.09 
0.06 
0.33 
0.98 
-0.16 
0.11 
-0.28 
0.00 
-0.03 
0.06 
-0.02 
0.34 
0.02 
0.18 
-0.03 
-0.02 
0.10 
-0.07 

e
m
u
l
o
v
t
r
o
p
x
E

-0.04 
-0.05 
0.31 
-0.12 
-0.12 
-0.01 
2.56 
0.20 
-0.15 
0.08 
-0.12 
0.59 
0.76 
0.03 
0.72 
0.41 
-0.03 
-0.26 
0.40 
0.22 
0.22 
0.18 
0.57 
0.14 
0.11 
-0.10 
0.11 

e
m
u
l
o
v
t
r
o
p
m

I

-0.05 
-0.02 
0.23 
-0.11 
-0.08 
-0.01 
0.40 
-0.01 
-0.12 
0.09 
-0.27 
0.47 
0.26 
0.04 
0.55 
0.32 
-0.03 
-0.24 
0.26 
-0.01 
0.06 
0.04 
0.37 
0.16 
0.13 
-0.05 
-0.01 

EU-27 
Source:  Own estimations using the WorldScan model. 

-0.03 

0.04 

0.00 

-0.03 

t
n
e
m
y
o
l
p
m
E

l
a
t
o
t

d
e
l
l
i
k
s
-
w
o
L

d
e
l
l
i
k
s
-
h
g
i
H

%

s
a
w
o
l

e
g
a
W

-
h
g
i
h
e
g
a
w

f
o

l
l
i
k
s

-0.01 
0.00 
0.12 
-0.03 
-0.06 
-0.01 
0.73 
0.10 
-0.14 
-0.02 
0.03 
0.18 
0.34 
-0.04 
0.14 
-0.10 
-0.04 
-0.04 
0.07 
0.04 
0.15 
0.05 
0.16 
-0.02 
0.00 
0.01 
0.02 

0.00 
0.00 
0.14 
-0.03 
-0.10 
0.00 
1.02 
0.13 
-0.17 
-0.03 
0.04 
0.22 
0.42 
-0.03 
0.21 
-0.06 
-0.09 
-0.06 
0.12 
0.03 
0.15 
0.07 
0.19 
-0.02 
0.02 
-0.02 
0.04 

-0.03 
0.00 
0.08 
-0.02 
-0.02 
-0.01 
0.12 
0.04 
-0.10 
0.00 
0.02 
0.09 
0.19 
-0.06 
0.05 
-0.17 
0.02 
-0.03 
0.00 
0.05 
0.16 
-0.02 
0.12 
-0.02 
-0.02 
0.05 
-0.01 

0.18 
0.01 
0.32 
0.00 
0.00 
0.03 
2.67 
0.34 
0.14 
0.11 
0.18 
0.56 
0.54 
0.08 
0.42 
0.46 
-0.02 
-0.03 
0.41 
0.40 
0.35 
0.35 
0.35 
0.04 
0.17 
-0.06 
0.28 

0.01 

0.03 

0.00 

0.19 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
Table 34: Scenario B – percentage changes in sectoral output share, relative changes with 
respect to the baseline values in 2020 

122 

y
r
t
n
u
o
C

,
l
i
o

,
e
r
u
t
l
u
c
i
r
g
A

s
l
a
r
e
n
i
m

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.02 
-0.04 
0.00 
-0.18 
-0.05 
-0.03 
-0.03 
-0.01 
-0.04 
-0.06 
0.01 
-0.02 
-0.08 
-0.05 
0.01 
0.00 
-0.06 
-0.24 
-0.05 
-0.10 
-0.10 
0.01 
-0.01 
-0.02 
-0.06 
-0.04 
-0.04 

s
r
e
i
r
r
a
c

y
g
r
e
n
E

0.02 
0.02 
0.00 
0.03 
0.01 
0.00 
0.00 
0.01 
0.02 
0.00 
0.01 
0.01 
0.00 
0.00 
0.04 
0.03 
0.00 
-0.04 
0.01 
0.02 
0.01 
0.03 
0.01 
0.00 
0.01 
0.01 
0.00 

.

h
c
e
t

w
o
L

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t

w
o
l
-

m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
h
-
m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
H

s
e
r
u
t
c
a
f
u
n
a
m

-0.04 
-0.18 
-0.03 
-0.05 
-0.15 
-0.06 
-0.19 
-0.09 
-0.18 
-0.20 
0.15 
-0.04 
-0.16 
-0.24 
0.00 
-0.06 
-0.08 
-0.13 
-0.18 
-0.35 
-0.32 
-0.09 
-0.06 
-0.13 
-0.16 
-0.19 
-0.20 

0.03 
0.02 
0.01 
0.01 
0.03 
0.01 
0.01 
0.02 
0.04 
0.01 
0.08 
0.02 
0.01 
0.01 
0.05 
0.01 
0.04 
0.00 
0.01 
0.06 
0.04 
0.04 
0.01 
0.04 
0.02 
0.01 
0.02 

0.09 
0.08 
0.01 
0.11 
0.11 
0.04 
0.05 
0.04 
0.07 
0.07 
0.13 
0.08 
0.07 
0.04 
0.09 
0.04 
0.04 
0.08 
0.05 
0.16 
0.11 
0.09 
0.06 
0.11 
0.08 
0.06 
0.08 

0.00 
0.01 
0.00 
0.01 
0.01 
0.00 
0.00 
0.01 
0.03 
0.00 
0.01 
0.02 
0.02 
0.01 
0.01 
0.01 
0.02 
0.09 
0.00 
0.01 
0.02 
0.01 
0.01 
0.01 
0.00 
0.00 
0.01 

l
a
i
c
r
e
m
m
o
C

s
e
c
i
v
r
e
s

d
n
a
t
n
e
m
n
r
e
v
o
G

s
e
c
i
v
r
e
s

r
e
h
t
o

0.06 
0.21 
0.01 
0.24 
0.15 
0.03 
0.11 
0.03 
0.21 
0.23 
0.40 
0.09 
0.16 
0.29 
0.16 
0.03 
0.29 
0.20 
0.15 
0.29 
0.38 
0.05 
0.00 
0.15 
0.26 
0.17 
0.28 

-0.17 
-0.10 
0.00 
-0.20 
-0.08 
0.01 
0.03 
-0.01 
-0.12 
-0.05 
-0.98 
-0.19 
-0.03 
-0.05 
-0.33 
-0.04 
-0.25 
0.03 
0.02 
-0.09 
-0.16 
-0.14 
-0.02 
-0.17 
-0.15 
0.06 
-0.14 

t
r
o
p
s
n
a
r
T

0.04 
-0.01 
0.00 
0.02 
-0.02 
0.00 
0.00 
0.00 
-0.03 
-0.01 
0.19 
0.02 
0.02 
0.00 
-0.03 
-0.02 
-0.01 
0.01 
-0.01 
0.00 
0.02 
0.01 
0.00 
0.01 
0.01 
-0.07 
0.00 

0.01 
EU-27 
Source:  Own estimations using the WorldScan model. 

-0.06 

-0.15 

0.02 

0.09 

0.01 

0.00 

0.15 

-0.08 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
  
 
123 

Scenario C 

It  is  expected  that  the  introduction  of  a  uniform  VAT  system  in  each  Member  State 
without zero and reduced rates would simplify the administrative procedures associated 
with  both  VAT  payments  by  firms  and  collection  by  tax  authorities.  These  potential 
administrative efficiencies are different from the allocation efficiencies associated with 
the VAT reforms. In this scenario we simulate the macroeconomic effects of taking into 
account these administrative efficiency gains associated with a uniform VAT system. 

To  implement  the  reduction  of  administrative  costs  in  WorldScan,  we  rely  on  Kox 
(2005)  and  Djankov  et  al.  (2002)  to  assess  the  impact  of  reducing  the  administrative 
burden  on  firms.  Kox  (2005)  combined  detailed  information  on  the  administrative 
burden  of  government  regulations  for  the  Netherlands  with  data  from  Djankov  et  al. 
(2002)  on  inter-country  differences  in  firm  start-up  costs.  This  approach  provided  a 
meaningful  international  comparison  to  obtain  estimates  of  the  administrative  burden 
per country. Furthermore, this approach assumes that wages for workers that firms need 
to  hire  to  comply  with  government  regulations  and  to  provide  the  government  with 
information  make  up  a  large  part  of  the  administrative  costs  for  firms.  Reducing  the 
administrative  burden  implies  that  some  of  these  workers  can  contribute  directly  to 
production. The reduction therefore takes the form of an increase in labour efficiency: 
fewer workers are needed, while production is not directly affected.  

These  administrative  costs  can  be  sizeable.  For  the  Netherlands  in  2002,  the 
administrative burden was equivalent to 3.7 % of GDP.106 According to 2002 data for 
the Dutch labour income share, reducing this administrative burden by 25 % amounts to 
a labour-efficiency increase of 1.6 %. The administrative Dutch data also show that the 
burden  associated  with  VAT  compliance  represented  9 %  of  the  total  administrative 
burden – i.e. around 0.33 % of GDP. The equivalent labour-efficiency increases for all 
EU Member States can be found in Kox (2005).107  

For scenario C we begin with the VAT changes from scenario B and then assume that 
the abolition of zero and reduced rates will reduce the administrative burden associated 
with VAT compliance by 20%.108 This leads to a labour productivity increase of around 

106 The equivalent figures for the EU estimated by Kox (2005) vary from 1.5 % in Finland, Sweden and the 

United Kingdom, to 6.8 % in Greece and Hungary. 

107  For  the  EU,  the  25%  reduction  is  associated  with  a  1.5%  labour  productivity  increase,  with  country-

specific effects ranging from 0.9% for the United Kingdom to 2.3% for Hungary. 

108 It is difficult to estimate the exact administrative efficiency gains of the proposed VAT reform. We use 
the 20 % value as an indicator of the potential gains of abolishing zero and reduced rates. However, we 

TAXUD/2012/DE/323 

 
 
 
                                                      
124 

0.12 %  for  the  EU,  where  the  country-specific  values  are  those  estimated  by  Kox 
(2005).  

In Table 35 we present the results for scenario C. We find that GDP in the EU increases 
slightly,  as  do  consumption,  trade  and  employment.  High-skill  employment  remains 
unchanged  while  the  wage  gap  between  low  and  high-skill  workers  decreases.  These 
EU-wide results are mostly mirrored by individual Member States, with the exception 
of  France  and  Hungary.  These  countries  experience  GDP  decreases,  but  these  are 
smaller  than  those  associated  with  scenario  B.  The  relative  sectoral  production  share 
changes  are  very  similar  to  those  from  scenario  B  (see  Table  32,  sectoral  production 
share changes disaggregated by Member State are presented in Table 36). 

In summary, including potential administrative efficiencies related to a simplified VAT 
structure produces small but positive GDP and employment increases in the EU. 

regard this 20 % decrease as an upper bound value, since the overall  administration of the VAT system 
remains  largely  unchanged  (e.g.  the  administrative  costs  associated  with  exempted  sectors  remain  in 
place). As a sensitivity test, we also ran the scenario with a 10 % decrease, and the resulting changes in 
GDP are roughly half of those resulting from a 20 % decrease.  

Study on VAT rates structure 

 
 
 
                                                                                                                                              
 
125 

Table 35: Scenario C – percentage changes in main economic indicators, relative changes 
in 2020 with respect to baseline values  

y
r
t
n
u
o
C

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

n
o
i
t
p
m
u
s
n
o
C

0.13 
0.11 
0.17 
0.03 
0.11 
0.14 
-0.08 
0.22 
-0.05 
0.01 
0.16 
0.45 
1.13 
-0.02 
0.20 
-0.13 
0.13 
0.07 
0.19 
0.10 
0.49 
0.15 
0.31 
0.10 
0.06 
0.18 
-0.01 

e
m
u
l
o
v
t
r
o
p
x
E

0.07 
0.06 
0.42 
-0.05 
-0.01 
0.12 
2.69 
0.33 
-0.03 
0.14 
-0.02 
0.70 
0.92 
0.18 
0.82 
0.55 
0.07 
-0.17 
0.53 
0.35 
0.39 
0.33 
0.70 
0.28 
0.19 
-0.02 
0.18 

e
m
u
l
o
v
t
r
o
p
m

I

0.04 
0.06 
0.32 
-0.04 
0.01 
0.09 
0.46 
0.07 
-0.03 
0.16 
-0.20 
0.55 
0.36 
0.14 
0.64 
0.43 
0.06 
-0.17 
0.37 
0.08 
0.16 
0.13 
0.48 
0.27 
0.20 
0.02 
0.04 

P
D
G

0.13 
0.10 
0.22 
0.02 
0.09 
0.14 
0.40 
0.26 
-0.04 
0.04 
0.19 
0.48 
1.19 
0.00 
0.30 
-0.03 
0.12 
0.07 
0.21 
0.19 
0.52 
0.19 
0.38 
0.11 
0.06 
0.14 
0.03 

EU-27 
Source: Own estimations using the WorldScan model. 

0.14 

0.08 

0.11 

0.05 

t
n
e
m
y
o
l
p
m
E

l
a
t
o
t

d
e
l
l
i
k
s
-
w
o
L

d
e
l
l
i
k
s
-
h
g
i
H

%

s
a
w
o
l

e
g
a
W

-
h
g
i
h
e
g
a
w

f
o

l
l
i
k
s

0.02 
0.02 
0.14 
-0.01 
-0.03 
0.02 
0.75 
0.14 
-0.10 
0.01 
0.06 
0.20 
0.37 
-0.01 
0.16 
-0.06 
-0.02 
-0.02 
0.11 
0.07 
0.19 
0.07 
0.19 
0.01 
0.02 
0.03 
0.04 

0.04 
0.03 
0.17 
-0.01 
-0.05 
0.03 
1.05 
0.18 
-0.12 
0.00 
0.07 
0.25 
0.45 
0.00 
0.24 
-0.01 
-0.05 
-0.03 
0.16 
0.08 
0.20 
0.10 
0.22 
0.02 
0.05 
0.00 
0.06 

-0.01 
0.00 
0.10 
-0.01 
0.00 
0.01 
0.13 
0.06 
-0.08 
0.02 
0.04 
0.10 
0.21 
-0.04 
0.06 
-0.15 
0.03 
-0.01 
0.02 
0.06 
0.19 
-0.01 
0.14 
0.00 
-0.01 
0.06 
0.00 

0.20 
0.06 
0.36 
0.02 
0.03 
0.07 
2.71 
0.37 
0.16 
0.14 
0.21 
0.62 
0.57 
0.12 
0.45 
0.51 
0.02 
0.00 
0.45 
0.43 
0.38 
0.40 
0.37 
0.07 
0.19 
-0.04 
0.29 

0.04 

0.06 

0.01 

0.21 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
 
Table 36: Scenario C – percentage changes in sectoral output share, relative changes with 
respect to the baseline values in 2020 

126 

y
r
t
n
u
o
C

,
l
i
o

,
e
r
u
t
l
u
c
i
r
g
A

s
l
a
r
e
n
i
m

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.04 
0.00 
-0.07 
-0.03 
-0.03 
-0.02 
-0.12 
-0.08 
-0.07 
-0.10 
-0.07 
-0.24 
-0.05 
-0.01 
-0.08 
-0.03 
-0.29 
-0.06 
-0.03 
-0.12 
-0.13 
-0.01 
-0.03 
-0.01 
-0.04 
-0.04 
-0.04 

s
r
e
i
r
r
a
c

y
g
r
e
n
E

0.01 
0.00 
0.02 
0.00 
0.00 
0.00 
0.00 
0.01 
-0.01 
-0.01 
-0.01 
0.02 
-0.02 
0.01 
0.00 
0.00 
-0.07 
0.02 
0.01 
0.03 
-0.01 
0.01 
0.00 
0.00 
0.02 
0.01 
0.00 

.

h
c
e
t

w
o
L

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t

w
o
l
-

m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
h
-
m
u
i
d
e
M

s
e
r
u
t
c
a
f
u
n
a
m

.

h
c
e
t
h
g
i
H

s
e
r
u
t
c
a
f
u
n
a
m

-0.26 
-0.04 
-0.24 
-0.08 
-0.24 
-0.12 
-0.32 
-0.27 
-0.27 
-0.23 
-0.30 
-0.15 
-0.18 
-0.07 
-0.15 
-0.08 
-0.23 
-0.25 
-0.12 
-0.50 
-0.53 
-0.13 
-0.33 
-0.08 
-0.24 
-0.25 
-0.32 

-0.01 
0.02 
0.02 
0.01 
0.00 
0.02 
0.01 
0.02 
0.01 
0.01 
0.02 
0.01 
0.03 
0.02 
0.00 
0.02 
0.00 
0.00 
0.03 
0.03 
-0.02 
0.04 
0.01 
0.02 
0.05 
0.01 
-0.01 

0.07 
0.02 
0.09 
0.05 
0.05 
0.05 
0.02 
0.06 
0.06 
0.21 
0.04 
0.09 
0.05 
0.05 
0.03 
0.11 
-0.04 
0.05 
0.11 
0.13 
0.01 
0.10 
0.06 
0.06 
0.05 
0.09 
0.03 

0.00 
0.00 
0.02 
0.00 
0.01 
0.01 
0.01 
0.00 
0.01 
0.06 
0.01 
0.02 
0.01 
0.01 
0.02 
0.03 
0.33 
0.00 
0.02 
0.01 
0.01 
0.01 
0.02 
0.02 
0.05 
0.00 
0.00 

l
a
i
c
r
e
m
m
o
C

s
e
c
i
v
r
e
s

d
n
a
t
n
e
m
n
r
e
v
o
G

s
e
c
i
v
r
e
s

r
e
h
t
o

0.15 
0.01 
0.12 
0.04 
0.07 
0.05 
0.23 
0.23 
0.17 
0.02 
0.24 
0.13 
0.04 
0.03 
0.19 
0.08 
0.01 
0.06 
-0.02 
0.21 
0.30 
0.04 
0.12 
0.00 
0.14 
0.10 
0.16 

0.09 
0.00 
0.04 
0.02 
0.17 
0.01 
0.23 
0.03 
0.12 
0.07 
0.09 
0.15 
0.16 
0.00 
0.00 
-0.15 
0.33 
0.21 
0.00 
0.21 
0.37 
-0.06 
0.17 
-0.01 
0.00 
0.17 
0.20 

t
r
o
p
s
n
a
r
T

-0.01 
0.00 
-0.01 
0.00 
-0.01 
0.00 
-0.05 
-0.01 
-0.03 
-0.02 
-0.01 
-0.02 
-0.04 
-0.02 
0.00 
0.02 
-0.04 
-0.02 
0.01 
-0.01 
0.00 
0.00 
-0.01 
-0.01 
-0.04 
-0.09 
-0.03 

0.01 
EU-27 
Source: Own estimations using the WorldScan model. 

-0.06 

-0.15 

0.02 

0.09 

0.01 

0.00 

0.15 

-0.08 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
  
127 

Scenario D 

An alternative policy option is to do a tax replacement exercise, where the increase in 
VAT  revenue  is  exactly  offset  by  a  decrease  in  capital-investment  tax  revenues.109  In 
scenario D we abolish zero and reduced VAT rates (as in scenario A) and keep the tax 
revenues  constant (as  in scenario  B).  However, instead  of endogenously  calculating  a 
new revenue-neutral standard VAT rate in WorldScan, in scenario D we maintain the 
standard VAT rates from scenario A, but endogenously decrease the capital-investment 
tax rate such that the total tax revenues are equal to the baseline values.  

In Table 37 we present the macroeconomic results for scenario D. For the EU-27 as a 
whole we find that GDP increases by half a percentage point. This significant increase 
is the result of a more efficient allocation of resources associated with the replacement 
of  a  distorting  tax  (capital  investment  tax)  with  a  less  distorting  one  (VAT).  On  the 
other hand, consumption and employment now decrease. We would expect this result, 
given  that  a  reduction  in  the  capital  investment  tax  incentives  more  savings  and 
investment,  which  in  a  general  equilibrium  setting  need  to  be  compensated  by  less 
consumption. Making capital more attractive increases the amount of capital per worker 
and decreases the demand for labour. The demand decreases more for low-skill labour, 
which tends to be a substitute for capital in many sectors. 

The  changes  in  the  sectoral  production  shares  are  very  different  from  the  previous 
scenarios  (see  Table  32  and  Table  38).  This  is  what  we  would  expect,  given  that  the 
general  equilibrium  effects  associated  with  the  changing  investment  and  production 
decisions  following  the  reduction  in  the  capital  investment  tax  entails  a  series  of 
additional adjustments in the model. Therefore, besides the changes in the VAT sector-
specific  rates,  in  this  scenario  we  also  have  that  the  relative  price  of  capital  is 
decreasing after the reduction in the capital investment tax. This second round of effects 
is what makes the sectoral changes  in this scenario different from previous scenarios. 
For instance, for the EU27 in Table 38 we observe an expansion in the medium-high 
and  high-tech  manufacturing  sectors,  both  of  which  are  capital  intensive  and  thus, 
benefit more from the decrease in the relative price of capital. The relative increase in 
these capital-intensive sectors draws resources away from other sectors and this creates 
a  general  equilibrium  effect  where  other  sectors  most  reduce their relative  production 

109 In WorldScan there are no corporate taxes as such. The profits of a representative firm in each sector are 
equal to the fixed costs of production associated with a monopolistic competition modelling framework. 
However, the tax on capital investments in WorldScan can be interpreted as an alternative to corporate 
taxes. Note that the capital-investment tax affects the flow and not the stock of capital. 

TAXUD/2012/DE/323 

 
                                                      
128 

(e.g.  low-tech  manufactures,  and  government  and  other  services) to accommodate the 
expansion of the capital intensive sectors. 

Although labour productivity increases with the amount of capital per worker  --which 
in  turn  creates  pressure  for  higher  wages  and  more  consumption--  this  effect  is 
dominated  by  the  increased  attractiveness  of  saving/investment  as  compared  to 
consumption in this scenario. Thus it becomes relatively more attractive to save than to 
consume. 

With  some  exceptions,  individual  Member  States  also  experience  a  GDP  increase 
together  with  consumption  and  employment  decreases.  The  general  equilibrium 
mechanisms in scenario D are more complex than in previous scenarios where the VAT 
changes  were  strongly  associated  with  final  goods  prices.  The  change  in  the  capital 
investment tax, however, also generates a direct effect on factor prices, namely: capital 
costs  and  wages,  which  has  an  impact  on  the  production  structure  for  each  Member 
State, but also generates incentives for capital movements between Member States. 

These results are in line with the main findings from Boeters et al. (2010). Using a CGE 
model  for  Germany  they  also  find  that  the  overall  economic  effects  of  a  pure  VAT 
reform is relatively small, while the introduction of a standard VAT rate in conjunction 
with  a  budget-neutral  tax  replacement  can  generate  substantial  positive  economic 
effects. 

Study on VAT rates structure 

 
129 

Table 37: Scenario D – percentage changes in main economic indicators, relative changes 
in 2020 with respect to baseline values  

y
r
t
n
u
o
C

P
D
G

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.32 
0.20 
1.84 
0.17 
0.57 
0.20 
0.26 
0.42 
0.30 
1.45 
0.37 
1.36 
0.66 
-0.01 
-0.04 
0.44 
2.08 
0.87 
0.86 
1.80 
-0.05 
0.30 
0.58 
0.24 
-0.69 
0.53 
1.04 

n
o
i
t
p
m
u
s
n
o
C

-1.95 
0.09 
-1.53 
-0.06 
-0.88 
-0.18 
-1.43 
-1.82 
-1.58 
-2.07 
-1.05 
-0.87 
-0.98 
-0.40 
-2.22 
-1.25 
-1.90 
-1.12 
-2.17 
-2.95 
-3.33 
-0.50 
-1.98 
-0.04 
-2.07 
-1.02 
-1.89 

e
m
u
l
o
v
t
r
o
p
x
E

0.86 
0.23 
1.67 
0.38 
0.58 
0.28 
0.40 
0.55 
0.24 
1.63 
0.68 
1.44 
1.37 
0.52 
1.76 
1.75 
2.44 
0.45 
1.39 
1.48 
0.29 
0.81 
1.12 
1.01 
-1.49 
0.87 
0.92 

e
m
u
l
o
v
t
r
o
p
m

I

1.12 
0.06 
2.10 
0.32 
1.14 
0.20 
0.66 
1.02 
1.07 
2.25 
0.73 
1.48 
0.98 
0.36 
1.84 
1.86 
2.72 
0.85 
1.79 
2.61 
1.51 
0.53 
1.38 
0.93 
-0.03 
1.63 
2.00 

EU-27 
Source: Own estimations using the WorldScan model. 

-1.45 

0.56 

0.72 

1.28 

t
n
e
m
y
o
l
p
m
E

l
a
t
o
t

d
e
l
l
i
k
s
-
w
o
L

d
e
l
l
i
k
s
-
h
g
i
H

%

s
a
w
o
l

e
g
a
W

-
h
g
i
h
e
g
a
w

f
o

l
l
i
k
s

-0.73 
0.03 
-0.37 
-0.01 
-0.37 
-0.04 
-0.51 
-0.49 
-0.66 
-0.63 
-0.31 
-0.16 
-0.15 
-0.09 
-0.64 
-0.40 
-0.68 
-0.37 
-0.59 
-1.06 
-0.98 
-0.07 
-0.37 
-0.01 
-0.64 
-0.38 
-0.51 

-0.88 
0.03 
-0.51 
-0.02 
-0.54 
-0.05 
-0.58 
-0.58 
-0.87 
-0.73 
-0.36 
-0.18 
-0.13 
-0.09 
-0.70 
-0.45 
-0.91 
-0.49 
-0.65 
-1.40 
-1.10 
-0.06 
-0.42 
-0.02 
-0.68 
-0.55 
-0.67 

-0.55 
0.03 
-0.15 
0.00 
-0.14 
-0.02 
-0.37 
-0.31 
-0.36 
-0.47 
-0.22 
-0.12 
-0.21 
-0.09 
-0.55 
-0.32 
-0.34 
-0.26 
-0.50 
-0.46 
-0.70 
-0.08 
-0.29 
0.01 
-0.58 
-0.18 
-0.28 

0.11 
-0.01 
-0.43 
-0.06 
-0.27 
-0.04 
-0.25 
0.05 
-0.12 
-0.39 
-0.01 
0.09 
0.46 
0.01 
0.12 
0.10 
-0.56 
-0.34 
-0.18 
-0.27 
0.11 
0.20 
0.03 
-0.01 
0.04 
-0.59 
-0.34 

-0.48 

-0.62 

-0.27 

-0.15 

TAXUD/2012/DE/323 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
 
Table 38: Scenario D – percentage changes in sectoral output share, relative changes with 
respect to the baseline values in 2020 

130 

y
r
t
n
u
o
C

,
l
i
o

,
e
r
u
t
l
u
c
i
r
g
A

s
l
a
r
e
n
i
m

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

-0.03 
-0.03 
0.00 
-0.28 
-0.09 
-0.04 
-0.04 
-0.03 
0.08 
-0.08 
-0.12 
-0.07 
-0.13 
-0.08 
-0.04 
-0.02 
-0.09 
-0.36 
-0.07 
-0.18 
-0.13 
-0.05 
-0.03 
-0.03 
-0.09 
-0.03 
-0.03 

s
r
e
i
r
r
a
c

y
g
r
e
n
E

0.01 
0.03 
0.00 
0.02 
-0.02 
0.00 
-0.01 
-0.01 
0.09 
-0.01 
-0.01 
-0.02 
-0.03 
-0.01 
0.02 
0.01 
0.01 
-0.09 
0.01 
-0.03 
0.00 
0.01 
-0.02 
-0.01 
0.00 
0.03 
0.00 

.

h
c
e
t

w
o
L

s
e
r
u
t
c
a
f
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n
a
m

.

h
c
e
t

w
o
l
-

m
u
i
d
e
M

s
e
r
u
t
c
a
f
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n
a
m

.

h
c
e
t
h
g
i
h
-
m
u
i
d
e
M

s
e
r
u
t
c
a
f
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n
a
m

.

h
c
e
t
h
g
i
H

s
e
r
u
t
c
a
f
u
n
a
m

-0.15 
-0.27 
-0.06 
-0.17 
-0.34 
-0.12 
-0.27 
-0.21 
0.00 
-0.30 
-0.35 
-0.19 
-0.35 
-0.36 
-0.08 
-0.12 
-0.17 
-0.29 
-0.26 
-0.64 
-0.61 
-0.19 
-0.18 
-0.33 
-0.31 
-0.27 
-0.30 

0.12 
0.05 
0.03 
0.04 
0.09 
0.02 
0.03 
0.04 
0.19 
0.05 
0.05 
0.03 
0.02 
0.10 
0.13 
0.03 
0.06 
0.03 
0.04 
0.13 
0.08 
0.06 
0.03 
0.15 
0.07 
0.06 
0.06 

0.27 
0.31 
0.03 
0.33 
0.33 
0.13 
0.15 
0.16 
-0.09 
0.15 
0.11 
0.29 
0.52 
0.18 
0.23 
0.12 
0.15 
0.13 
0.22 
0.61 
0.26 
0.24 
0.18 
0.21 
0.17 
0.21 
0.20 

0.03 
0.02 
0.01 
0.06 
0.09 
0.02 
0.05 
0.00 
-0.63 
0.03 
0.03 
0.18 
0.20 
0.03 
0.06 
0.04 
0.10 
0.91 
0.02 
0.06 
0.05 
0.02 
0.10 
0.06 
0.02 
0.04 
0.07 

l
a
i
c
r
e
m
m
o
C

s
e
c
i
v
r
e
s

d
n
a
t
n
e
m
n
r
e
v
o
G

s
e
c
i
v
r
e
s

r
e
h
t
o

0.24 
0.35 
0.01 
0.55 
0.30 
0.04 
0.22 
0.06 
0.63 
0.47 
0.50 
0.09 
0.08 
0.38 
0.27 
0.04 
0.55 
0.09 
0.25 
0.49 
0.92 
0.10 
-0.02 
0.33 
0.49 
0.28 
0.52 

-0.45 
-0.45 
0.00 
-0.46 
-0.24 
-0.03 
-0.12 
-0.02 
-0.27 
-0.26 
-0.16 
-0.29 
-0.27 
-0.23 
-0.55 
-0.08 
-0.61 
-0.32 
-0.17 
-0.36 
-0.54 
-0.20 
-0.04 
-0.37 
-0.32 
-0.20 
-0.47 

t
r
o
p
s
n
a
r
T

-0.04 
0.00 
0.00 
-0.07 
-0.11 
0.00 
-0.02 
0.01 
0.00 
-0.04 
-0.05 
-0.02 
-0.05 
-0.01 
-0.05 
-0.02 
0.00 
-0.10 
-0.04 
-0.07 
-0.03 
-0.01 
-0.02 
-0.02 
-0.02 
-0.12 
-0.04 

-0.05 
EU-27 
Source: Own estimations using the WorldScan model. 

-0.16 

-0.34 

0.05 

0.28 

0.51 

-0.15 

0.23 

-0.36 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
  
  
  
  
  
 
131 

Scenario E110 

Finally, for scenario E we simulate a government policy where the increase in VAT tax 
revenue from scenario A is redistributed back to low-skilled worker households (both 
employed and unemployed).111   

implicitly 

transferred  back 

It  is  important  to  recall  that  in  WorldScan  all  additional  tax  revenues  –  besides 
unemployment  benefits  –  are 
to  households.  For 
unemployed households, the model specifies a payment of unemployment benefits and 
in the simulation of scenario A, these unemployment benefits are adjusted sufficiently 
to compensate for the VAT rate increases.112 Therefore, in scenario E, the higher VAT 
revenues associated with the abolition of zero and reduced rates are used to pay for the 
price-indexed  unemployment  benefits,  with  the  remainder  being  transferred  to  low-
skilled households. Therefore, the real value of transfers to other households (high-skill 
employed  and  unemployed  households  and  the  residual  household)  and  government 
consumption is lower in scenario E than in scenario A. 

However,  the  results  of scenario  E are  qualitatively and  quantitatively  very  similar  to 
those  of  scenario  A.  There  is  an  overall  small  decrease  in  GDP,  consumption  and 
employment. The main difference is that the real income of both low-skill households 
increases,  at  the  expense  of  the  high-skill  and  residual  households.  This  suggests  a 
decrease  in  overall  income  inequality.  However,  since  the  residual  household  in  the 
model  includes  both  high-income  households  (who  receive  capital  rents  and  pension 
transfers)  and  low-income  households  (who  receive  welfare  and  social  security 
transfers), it  is  not clear  that  all  low-income  households  will  benefit in this  particular 
scenario. Thus the actual inequality outcome is uncertain.113  

Moreover, the aggregated consumption structure of scenario E does not differ from the 
consumption  structure  in  scenario  A,  even  though  the  model  accounts  for  non-

110 The results can be found in the annexed spread sheets. 
111  It  is  important  to  note  that  this  scenario  is  conceptually  different  from  a  pure  income  distribution 
analysis,  since  in  WorldScan,  households  are  not  divided  into  income  groups.  Recall  that  such  a 
distributional analysis was performed in Scenario 3 in the previous section. 

112 This applies to both unemployment benefits present in the model: the “basic income” and the “wage-
indexed  benefits”  payments.  In  other  words,  the  real  value  of  social  benefits  is  automatically  kept 
constant in the model. Moreover, we do not change these unemployment benefits in scenario E because 
this can generate additional effects on the household decision to work or not, which are not relevant to the 
VAT reform. 

113  The  particular  household  classification  of  this  version  of  WorldScan  was  chosen  to  model  the 

endogenous decision of households to supply labour, but not to directly assess distributional issues. 

TAXUD/2012/DE/323 

  
 
 
                                                      
132 

homotheticity (i.e. that the consumption structure changes when income changes). The 
actual income changes that occur in scenario E are too small to significantly affect the 
aggregated sectoral consumption shares. 

To sum up, Table 39 summarizes the main macroeconomic outcomes for each scenario 
for the EU-27.  

Table 39: Summary of macroeconomic consequences for each scenario for the EU-27 as a 
whole, percentage changes with respect to the baseline 

Scenario 

P
D
G

A 

B 

C 

D 

E 

-0.37 

0.00 

0.11 

0.56 

-0.37 

n
o
i
t
p
m
u
s
n
o
C

-0.71 

-0.03 

0.08 

-1.45 

-0.71 

e
m
u
l
o
v
t
r
o
p
x
E

-0.69 

0.04 

0.14 

0.72 

e
m
u
l
o
v
t
r
o
p
m

I

-0.45 

-0.03 

0.05 

1.28 

-0.69 

-0.45 

t
n
e
m
y
o
l
p
m
E

l
a
t
o
t

d
e
l
l
i
k
s
-
w
o
L

d
e
l
l
i
k
s
-
h
g
i
H

s
a
w
o
l

e
g
a
W

e
g
a
w

f
o
%

l
l
i
k
s
-
h
g
i
h

-0.49 

-0.65 

-0.26 

-0.36 

0.01 

0.04 

-0.48 

-0.49 

0.03 

0.06 

-0.62 

-0.65 

0.00 

0.01 

-0.27 

-0.26 

0.19 

0.21 

-0.15 

-0.36 

Source: Own estimations using the WorldScan model. 

Study on VAT rates structure 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
133 

4  Conclusions 

This report compiles data on VAT liabilities for households and non-household entities 
(exempt  sectors,  governments  or  others  entities  who  pay  VAT  on  their  intermediate 
consumption)  in  the  EU-27  Member  States.  The  objective  of  the  study  is  to  estimate 
VAT  payments  of  different  sectors  in  2011,  broken  down  by  category  of  goods  and 
services,  and  how  VAT  contributions  vary  across  subgroups  defined  by  various 
characteristics (such as household characteristics or  sectors). We also analyse how the 
zero  and  reduced  VAT  rates  currently  in  place  in  EU-27  countries  influence  VAT 
payments by simulating various reform scenarios that abolish these rates. We calculate 
the additional VAT revenues that would be generated by these reforms, and analyse the 
impact of changes in the VAT rates structure on important macroeconomic indicators.  

To  analyse  the  effects  of  changes  in  the  VAT  rates  structure  we  take  two  different 
approaches.  We  use  a  static  model  to  assess  the  effects  of  an  abolition  of  zero  and 
reduced rates on private households, non-households entities and VAT revenues. This 
static approach enables us to analyse the distributional effects of the differentiated VAT 
rates structure at one point in time, and estimate the additional revenues that could be 
raised by abolishing zero and reduced VAT rates. This analysis is purely mechanical – 
that  is,  we  do  not  take  into  account  behavioural  reactions  of  households  and  non-
households,  although  we  would  expect  them  to  adjust  their  demand  and  supply  in 
response to a change in relative prices, which would change the results. We also do not 
take into account that governments might not be able to collect all of the VAT liabilities 
we calculate. Nevertheless, static approaches are widely used, especially in the field of 
distributional  analysis,  as  they  enable  a  detailed  insight  into  basic  mechanisms  and 
short-term effects.  

We  then  use  a  comprehensive  general  equilibrium  model  (WorldScan)  to  analyse  the 
medium  term  consequences  of  various  VAT  reforms  on  important  macroeconomic 
aggregates.  This  dynamic  model  integrates  important  economic  parameters  (firms, 
households  and  governments)  in  the  EU-27  countries  and  takes  into  account 
behavioural reactions. The complexity of the model precludes modelling each sector of 
the economy in great detail in order to preserve computability. Standard Computational 
General Equilibrium models like WorldScan are developed for the analysis of medium 
and long-term questions that involve inter-regional and inter-sectoral effects of policy 
shocks  to  the  real  economy,  predicting  changes in  aggregates like  GDP,  consumption 
and employment. In general, these models do not incorporate features to analyse short-

TAXUD/2012/DE/323 

 
 
134 

term  or  monetary  consequences  like  inflation,  nominal  interest  rates  and  nominal 
exchange rates fluctuations.  

Although  we  simulate  similar  reform  scenarios  in  both  parts  of  the  analysis  (we 
consider abolishing  zero  and  reduced rates,  or  compute  a  new  standard  rate  such  that 
revenues  remain  neutral),  the  scenarios  are  not  entirely  the  same.  For  example,  the 
static analysis of scenario 1 (abolishing zero and reduced rates)  does not specify how 
the  government  spends  the  additional  VAT  revenues.  In  contrast,  the  general 
equilibrium  analysis  automatically  channels  these  revenues  back  into  the  economy  to 
keep  the  budget  balanced.  The  two  approaches  are  complementary,  in  that  each 
approach can tackle different aspects of the analysis of VAT reform: while the dynamic 
approach  indicates  how  important  economic  parameters  will  change  in  the  medium 
term  following  a  change  in  the  VAT  rate  structure,  it  cannot  assess  the  distributional 
consequences  of  such  changes;  the  static  approach,  on  the  other  hand,  can  answer 
distributional questions, but is not capable of assessing medium term effects.  

We  find  a  very  heterogeneous  pattern  of VAT rates structures across  EU-27  Member 
States. Some Member States make very little use of zero and reduced  rates (Bulgaria, 
Denmark, the Baltic states, Hungary, Romania and Slovakia), while others apply zero, 
super  reduced,  reduced  or  parking  rates  to  a  large  number  of  supplies  (Cyprus, 
Luxembourg,  Ireland,  and the  UK  among  others). This  differentiated  picture  makes  it 
hard to  draw  general conclusions  for the  EU-27  as  a whole. We  nevertheless  want to 
summarise some general results.  

VAT  is  often  believed  to  be  a  regressive  tax,  as  households  with  a  low  income  at  a 
given  point  in  time  spend  a  higher  share  of  their  current  income  on  VAT  payments. 
However, the conclusion on whether VAT is regressive or progressive to a great extent 
depends on whether we believe the income or the expenditure distribution to be more 
indicative of economic inequality, and whether we look at VAT payments in proportion 
to income or in proportion to expenditures (Carrera 2010, Crossley et al. 2009, IFS et 
al.  2011).  Given  the  available  data  we  can  only  assess  whether  a  VAT  system  is 
progressive, proportional or regressive based on the ratio between VAT payments and 
expenditures for different income classes; although it would be interesting to also have 
this information for different expenditure classes. However, we do not consider the fact 
that  we  do  not  have  data  on  VAT  payments  in  relation  to  income  as  a  caveat  of  our 
study,  because  this  is  a  misleading  indicator  of  the  progressivity  of  a  VAT  system 
according to IFS et al. (2011). 

Study on VAT rates structure 

 
 
 
 
135 

Using  this  measure  we  find  that  in  about  half  of  the  EU-27  Member  States,  reduced 
rates,  in  combination  with  exemptions,  achieve  one  of  their  main  objectives  – 
alleviating the VAT burden for lower income households. In these countries, the VAT 
rates structure is progressive, leading to a lower tax burden for low-income households 
relative to their expenditure. However, countries that have a progressive VAT system 
do not limit reduced rates to goods and services that are disproportionally consumed by 
poor households. For example, high-income households typically spend a larger share 
of  their  budgets  on  restaurants,  accommodation  services  and  books  and  newspapers 
than  poorer  households  do;  therefore,  a  lower  tax  burden  on  these  supplies  is  not 
progressive. The remaining countries can be described as having a roughly proportional 
VAT system – on average, low- and high-income households pay about the same share 
of their expenditure in VAT. Hungary’s VAT system is the only one we would classify 
as regressive.  

The  effect  of  abolishing  zero  and  reduced  rates  differs  between  Member  States. 
Unsurprisingly, countries with few supplies taxed at zero and reduced rates experience 
almost no change. But many countries could raise significant additional VAT revenues 
(amounting  to  up  to  3.3 %  of  GDP)  by  abolishing  zero  and  reduced  rates.  In  most 
countries, increases in VAT liability are higher for households than for non-households 
paying non-recoverable VAT on their inputs. This is due to the fact that most zero and 
reduced  rates  apply  to  supplies  consumed  primarily  by  households.  Nevertheless, 
certain sectors face a considerable increase in their VAT burdens; examples are the real 
estate, education and health sectors. For sectors that depend on subsidies, such as health 
or  education,  or  non-profit  institutions  serving  households,  additional  subsidies  might 
be  necessary  to  maintain  the  level  of  services  provided;  that  is,  part  of  the  additional 
VAT revenues might have to be redistributed.  

Regarding  the  impact  on  the  income  distribution,  we  find  that  in  most  countries,  the 
abolition of zero and reduced rates hits lower-income households harder when we look 
at VAT payments as a fraction of total expenditure. In absolute terms, however, higher-
income  households  suffer  more.  That  is,  in  absolute  terms,  high-income  households 
benefit  more  from  the  existing  zero  and  reduced  rates  than  low-income  households. 
This  points  to the  limits  of  the  potential  of  zero and reduced VAT rates  as  a  tool  for 
redistribution. What is more, we find that if we grant low-income households a lump-
sum transfer that enables them to purchase the same consumption bundle as before the 
reform, the additional VAT revenues generated by the reform are still substantial. The 
otherwise high additional burden that abolishing zero and reduced VAT rates would put 

TAXUD/2012/DE/323 

 
 
136 

on low-income households could thus be avoided at a relatively low cost. The challenge 
would be to set-up and administer such a compensating benefit.  

If we abolish zero and reduced rates, and, at the same time, decrease the standard VAT 
rate such that the reform is revenue neutral, we find that in most countries, VAT bills of 
private  households  increase,  while  those  of  non-households  decrease.  Within  the 
household sector we show that this reform is regressive for most countries: as a fraction 
of  expenditure,  the  additional  burden  is  higher  for  low-income  households  than  for 
households further up the income distribution. In some countries, this is the case even 
in  absolute  terms.  For  richer  households,  the lower  standard  rate  compensates  for  the 
abolition  of  zero  and  reduced  rates.  By  design,  this  reform  does  not  change  the  wide 
gap in effective VAT rates between EU Member States – in countries that make heavy 
use of zero and reduced rates, the standard VAT rate decreases sharply, while in other 
countries there is hardly any change: Denmark’s new standard rate is twice as high as 
Cyprus’ or Luxembourg’s new rate.  

This variation in VAT rates across Member States might also be part of the explanation 
as  to  why  the  general  equilibrium  analysis  only  finds  marginal  effects  of  a  revenue 
neutral  abolition  of  zero  and  reduced  rates  on  GDP  in  the  EU-27  on  average.  While 
results  differ  across  Member  States,  with  some  experiencing  gains  while  others  face 
losses following the introduction of a new uniform, budget neutral standard VAT rate, 
we  hardly  find  the  increase  in  allocative  efficiency  we  would  have  expected.  This  is 
because,  although  the  reform  scenarios  generate  a  uniform  VAT  rates  system  within 
each  country,  the  exempt  status  of  several  sectors  is  kept  in  place,  and  because  VAT 
rates  continue  to  differ  between  Member  States.  On  the  other  hand,  employment 
increases,  especially  for 
low-skilled,  which  could  attenuate  the  negative 
distributional effects caused by the change in the VAT rates structure. Moreover, if we 
include  potential  administrative  cost  reductions  associated  with  a  simplified  VAT 
system, we do find marginally positive effects on GDP for the EU-27 as a whole. When 
we increase zero and reduced rates to the standard rate and decrease investment capital 
tax revenues to keep overall tax revenues constant, we find a sizeable increase in GDP.  

the 

Although we believe our data to be generally sound, there are several issues, especially 
regarding  the  household  analysis,  which  are  caused  by  the  fact  that  we  have  to  work 
with  aggregate  instead  of  micro  data.  For  some  countries,  there  is  no  information  on 
imputed  rents,  which  could  bias  the  results;  we  assume  household  income  and 
expenditures  not  to  be  equivalised  to  account  for  household  size;  and  we  lack  more 
detailed  socio-economic  and  demographic  information  that  might  facilitate  the 

Study on VAT rates structure 

 
 
 
137 

comparison of results between countries.114 Furthermore, there is a significant time lag 
in the data delivery: the aggregate HBS data is from 2005, a newer wave (2010) is only 
expected to be released later this year. 

Notwithstanding these limitations, this report presents a comprehensive overview of the 
distributional impact of the diversified VAT rates structure across the EU. It presents an 
estimate of the budgetary effects of abolishing this diversified VAT rates structure for 
each  Member  State,  of  the  effect  this  would  have  on  households  and  non-household 
entities  before  behavioural  responses,  and  of  the  effects  a  more  unified  VAT  rates 
structure within each Member State might have in the medium run on the economy in 
general.  

114  For  example,  our  data  do  not  allow  us  to  answer  basic  questions,  like:  Are  households  in  the  first 
quintile  disproportionately  headed  by  an  old  or  economically  inactive  person?  Which  income  quintiles 
contain the most children? 

TAXUD/2012/DE/323 

 
 
  
                                                      
138 

A.  Annex 

A.1 Growth rates applied to HBS data  

Table 40: Growth rates applied to HBS data (uprate from 2005 to 2011) 

GROWTH 
RATES  
(2005 - 2011) 
CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
CP11 
CP12 
Total (NA)* 
Total (HBS)* 

GROWTH 
RATES  
(2005 - 2011) 
CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
CP11 
CP12 
Total (NA)* 
Total (HBS)* 

AT 

BE 

BG** 

CY 

CZ 

DE 

DK 

EE 

EL 

14.3% 
15.8% 
10.1% 
20.4% 
16.4% 
15.0% 
21.4% 
-10.2% 
19.8% 
7.6% 
28.1% 
20.0% 
18.5% 
18.0% 

18.5% 
7.9% 
18.3% 
18.8% 
15.3% 
24.2% 
21.9% 
-12.2% 
14.4% 
16.3% 
22.5% 
22.6% 
18.1% 
18.3% 

45.6% 
223.5% 
57.5% 
42.9% 
219.3% 
79.4% 
58.8% 
58.0% 
146.1% 
79.4% 
17.2% 
111.7% 
69.2% 
63.7% 

10.2% 
26.3% 
7.1% 
42.2% 
3.6% 
30.8% 
-6.4% 
15.3% 
14.9% 
26.9% 
11.7% 
2.1% 
14.1% 
16.0% 

44.1% 
75.8% 
0.3% 
64.8% 
47.9% 
76.3% 
33.5% 
39.9% 
27.7% 
47.7% 
50.8% 
64.5% 
49.4% 
46.9% 

20.2% 
6.4% 
8.5% 
16.3% 
8.0% 
26.5% 
13.9% 
3.6% 
10.1% 
35.4% 
25.4% 
13.8% 
14.9% 
15.0% 

15.9% 
8.0% 
11.2% 
22.4% 
0.6% 
18.9% 
6.2% 
-3.8% 
8.2% 
33.0% 
20.7% 
12.3% 
13.7% 
13.7% 

36.1% 
43.4% 
23.5% 
37.5% 
3.4% 
9.0% 
40.7% 
38.5% 
-9.8% 
-27.0% 
39.7% 
15.9% 
28.1% 
29.5% 

11.8% 
14.9% 
-23.7% 
41.0% 
-11.2% 
21.1% 
4.3% 
5.3% 
10.4% 
22.1% 
-0.7% 
3.7% 
11.6% 
12.9% 

ES** 

FI 

FR 

HU 

IE 

IT 

LT 

LU 

LV 

8.8% 
13.1% 
0.8% 
32.1% 
-1.4% 
12.2% 
4.2% 
16.3% 
0.5% 
8.3% 
1.9% 
-2.0% 
8.6% 
12.9% 

27.2% 
19.5% 
28.1% 
33.9% 
25.4% 
36.6% 
11.2% 
-0.5% 
21.5% 
22.0% 
19.2% 
38.5% 
25.8% 
26.1% 

12.0% 
11.7% 
-1.3% 
18.1% 
10.0% 
21.5% 
13.3% 
4.7% 
5.9% 
31.8% 
11.0% 
16.6% 
13.0% 
13.2% 

14.7% 
34.4% 
-7.6% 
31.4% 
-23.1% 
18.2% 
-7.4% 
-1.6% 
-4.1% 
4.1% 
19.2% 
26.0% 
11.4% 
11.0% 

1.3% 
-4.2% 
-19.7% 
-0.9% 
-34.9% 
21.1% 
0.5% 
-19.0% 
-8.1% 
66.3% 
-11.7% 
-29.5% 
-8.3% 
-7.4% 

5.5% 
12.0% 
1.0% 
21.7% 
4.4% 
7.5% 
2.5% 
-3.2% 
12.8% 
16.1% 
18.4% 
7.2% 
9.9% 
10.8% 

64.3% 
80.3% 
36.4% 
90.3% 
64.3% 
61.1% 
68.4% 
81.2% 
59.1% 
112.0% 
61.1% 
89.8% 
71.2% 
69.8% 

14.3% 
-10.7% 
25.8% 
22.9% 
7.5% 
35.8% 
19.9% 
6.4% 
-2.7% 
175.1% 
8.2% 
18.1% 
13.9% 
17.3% 

57.7% 
84.7% 
22.3% 
107.1% 
68.5% 
73.8% 
112.7% 
38.5% 
67.2% 
23.5% 
56.9% 
129.1% 
76.5% 
73.9% 

Study on VAT rates structure 

 
 
139 

SI 

SE 

PT 

PL 

SK 

NL 

MT 

RO** 

UK*** 

GROWTH 
RATES  
(2005 - 2011) 
CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
CP11 
CP12 
Total (NA)* 
Total (HBS)* 
Source: National Accounts Data (Eurostat), own calculations. 
* Because the expenditure structure differs between HBS and NA data to begin with, applying the category 
specific growth rates from the NA data to the HBS data leads to different aggregate growth rates between 
the HBS and NA data.  

71.2% 
69.5% 
67.2% 
77.0% 
102.1% 
118.5% 
61.1% 
81.8% 
94.9% 
83.4% 
44.8% 
109.2% 
79.1% 
77.6% 

40.0% 
74.8% 
65.1% 
62.0% 
51.8% 
172.9% 
-4.4% 
268.5% 
122.7% 
-15.8% 
-3.4% 
160.2% 
51.7% 
67.0% 

18.6% 
18.9% 
-16.5% 
47.7% 
4.3% 
42.5% 
25.3% 
14.9% 
26.0% 
20.4% 
38.2% 
48.8% 
26.1% 
22.7% 

-5.6% 
-9.5% 
-4.4% 
10.3% 
-19.9% 
2.4% 
-12.9% 
-7.3% 
-16.2% 
-6.3% 
-12.1% 
-25.6% 
-9.1% 
0.0% 

18.9% 
15.7% 
10.9% 
15.5% 
1.6% 
-44.1% 
15.2% 
-5.5% 
5.7% 
28.2% 
7.4% 
-0.5% 
6.8% 
9.2% 

27.1% 
23.6% 
24.6% 
24.1% 
27.4% 
26.3% 
15.2% 
16.3% 
21.4% 
37.7% 
39.9% 
36.2% 
24.8% 
24.2% 

30.2% 
41.6% 
32.3% 
48.2% 
48.4% 
60.7% 
65.9% 
26.0% 
47.6% 
38.4% 
43.8% 
54.2% 
44.9% 
43.8% 

16.9% 
0.7% 
13.1% 
21.1% 
2.6% 
33.3% 
-1.7% 
9.5% 
7.4% 
33.2% 
17.1% 
27.6% 
14.2% 
15.6% 

30.9% 
44.9% 
26.8% 
34.9% 
35.5% 
39.4% 
29.5% 
21.6% 
5.5% 
42.4% 
39.6% 
42.3% 
31.2% 
30.9% 

** NA data not available for 2011 (we uprate to the latest year for which NA data are available, after that 

we uprate using GDP growth to 2011). 

Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny, 7.451 Danish kroner, 0.706 Latvian 
lats,  3.453  Lithuanian  litai,  279.370  Hungarian  forints,  4.121  Polish  zloty,  4.212  Romanian  lei,  9.030 
Swedish kronor and 0.868 British pounds to 1 Euro. 

TAXUD/2012/DE/323 

 
 
140 

A.2 COICOP Classification 

COICOP groups (two-digit level) 
CP00 - Total 
CP01 - Food and non-alcoholic beverages 
CP02 - Alcoholic beverages, tobacco and narcotics 
CP03 - Clothing and footwear 
CP04 - Housing, water, electricity, gas and other fuels 
CP05 - Furnishings, household equipment and routine maintenance of the house 
CP06 - Health 
CP07 - Transport 
CP08 - Communication 
CP09 - Recreation and culture 
CP10 - Education 
CP11 - Restaurants and hostels 
CP12 – Miscellaneous 

COICOP groups (three-digit level) 
CP011 - Food 
CP012 - Non-alcoholic beverages 
CP021 - Alcoholic beverages 
CP022 - Tobacco 
CP023 - Narcotics 
CP031 - Clothing 
CP032 - Footwear including repair 
CP041 - Actual rentals for housing 
CP042 - Imputed rentals for housing 
CP043 - Maintenance and repair of the dwelling 
CP044 - Water supply and miscellaneous services relating to the dwelling 
CP045 - Electricity, gas and other fuels 
CP051 - Furniture and furnishings, carpets and other floor coverings 
CP052 - Household textiles 
CP053 - Household appliances 
CP054 - Glassware, tableware and household utensils 
CP055 - Tools and equipment for house and garden 
CP056 - Goods and services for routine household maintenance 
CP061 - Medical products, appliances and equipment 
CP062 - Out-patient services 

Study on VAT rates structure 

 
141 

CP063 - Hospital services 
CP071 - Purchase of vehicles 
CP072 - Operation of personal transport equipment 
CP073 - Transport services 
CP081 - Postal services 
CP082 - Telephone and telefax equipment 
CP083 - Telephone and telefax services 
CP091 - Audio-visual, photographic and information processing equipment 
CP092 - Other major durables for recreation and culture 
CP093 - Other recreational items and equipment, gardens and pets 
CP094 - Recreational and cultural services 
CP095 - Newspapers, books and stationery 
CP096 - Package holidays 
CP101 - Pre-primary and primary education 
CP102 - Secondary education 
CP103 - Post-secondary non-tertiary education 
CP104 - Tertiary education 
CP105 - Education not definable by level 
CP111 - Catering services 
CP112 - Accommodation services 
CP121 - Personal care 
CP122 - Prostitution 
CP123 - Personal effects n.e.c. 
CP124 - Social protection 
CP125 - Insurance 
CP126 - Financial services n.e.c. 
CP127 - Other services n.e.c. 

COICOP groups (four-digit level) 
CP0111 - Bread and cereals 
CP0112 - Meat 
CP0113 - Fish and seafood 
CP0114 - Milk, cheese and eggs 
CP0115 - Oils and fats 
CP0116 - Fruit 
CP0117 - Vegetables 
CP0118 - Sugar, jam, honey, chocolate and confectionery 
CP0119 - Food products n.e.c. 

TAXUD/2012/DE/323 

 
142 

CP0121 - Coffee, tea and cocoa 
CP0122 - Mineral waters, soft drinks, fruit and vegetable juices 
CP0211 - Spirits 
CP0212 - Wine 
CP0213 - Beer 
CP0221 - Tobacco (ND) 
CP0231 - Narcotics (ND) 
CP0311 - Clothing materials 
CP0312 - Garments 
CP0313 - Other articles of clothing and clothing accessories 
CP0314 - Cleaning, repair and hire of clothing 
CP0321 - Shoes and other footwear 
CP0322 - Repair and hire of footwear 
CP0411 - Actual rentals paid by tenants 
CP0412 - Other actual rentals 
CP0421 - Imputed rentals of owner-occupiers 
CP0422 - Other imputed rentals 
CP0431 - Materials for the maintenance and repair of the dwelling 
CP0432 - Services for the maintenance and repair of the dwelling 
CP0441 - Water supply 
CP0442 - Refuse collection 
CP0443 - Sewerage collection 
CP0444 - Other services relating to the dwelling n.e.c. 
CP0451 - Electricity 
CP0452 - Gas 
CP0453 - Liquid fuels 
CP0454 - Solid fuels 
CP0455 - Heat energy 
CP0511 - Furniture and furnishings 
CP0512 - Carpets and other floor coverings 
CP0513 - Repair of furniture, furnishings and floor coverings 
CP0521 - Household textiles (SD) 
CP0531 - Major household appliances whether electric or not 
CP0532 - Small electric household appliances 
CP0533 - Repair of household appliances 
CP0541 - Glassware, tableware and household utensils (SD) 
CP0551 - Major tools and equipment 
CP0552 - Small tools and miscellaneous accessories 

Study on VAT rates structure 

143 

CP0561 - Non-durable household goods 
CP0562 - Domestic services and household services 
CP0611 - Pharmaceutical products 
CP0612 - Other medical products 
CP0613 - Therapeutic appliances and equipment 
CP0621 - Medical services 
CP0622 - Dental services 
CP0623 - Paramedical services 
(CP063 - see above) 
CP0711 - Motor cars 
CP0712 - Motor cycles 
CP0713 - Bicycles 
CP0714 - Animal drawn vehicles 
CP0721 - Spares parts and accessories for personal transport equipment 
CP0722 - Fuels and lubricants for personal transport equipment 
CP0723 - Maintenance and repair of personal transport equipment 
CP0724 - Other services in respect of personal transport equipment 
CP0731 - Passenger transport by railway 
CP0732 - Passenger transport by road 
CP0733 - Passenger transport by air 
CP0734 - Passenger transport by sea and inland waterway 
CP0735 - Combined passenger transport 
CP0736 - Other purchased transport services 
CP0811 - Postal services (S) 
CP0821 - Telephone and telefax equipment (D) 
CP0831 - Telephone and telefax services (S) 
CP0911  -  Equipment  for  the  reception,  recording  and  reproduction  of  sound  and 

     pictures 

CP0912 - Photographic and cinematographic equipment and optical instruments 
CP0913 - Information processing equipment 
CP0914 - Recording media 
CP0915  -  Repair  of  audio-visual,  photographic  and 

information  processing 

     equipment 

CP0921 - Major durables for outdoor recreation 
CP0922 - Musical instruments and major durables for indoor recreation 
CP0923 - Maintenance and repair of other major durables for recreation and culture 
CP0931 - Games, toys and hobbies 
CP0932 - Equipment for sport, camping and open-air recreation 

TAXUD/2012/DE/323 

  
  
144 

CP0933 - Gardens, plants and flowers 
CP0934 - Pets and related products 
CP0935 - Veterinary and other services for pets 
CP0941 - Recreational and cultural services 
CP0942 - Cultural services 
CP0943 - Games of chance 
CP0951 - Books 
CP0952 - Newspapers and periodicals 
CP0953 - Miscellaneous printed matter 
CP0954 - Stationery and drawing materials 
(CP096 - see above) 
CP1011 - Pre-primary and primary education (S) 
CP1021 - Secondary education (S) 
CP1031 - Post-secondary non-tertiary education (S) 
CP1041 - Tertiary education (S) 
CP1051 - Education non definable by level (S) 
CP1111 - Restaurants, cafés and the like 
CP1112 - Canteens 
CP1121 - Accommodation services (S) 
CP1211 - Hairdressing salons and personal grooming establishments 
CP1212 - Electrical appliances for personal care 
CP1213 - Other appliances, articles and products for personal care 
CP1221 - Prostitution (S) 
CP1231 - Jewellery, clocks and watches 
CP1232 - Other personal effects 
CP1241 - Social protection services (S) 
CP1252 - Insurance connected with the dwelling 
CP1253 - Insurance connected with health 
CP1254 - Insurance connected with transport 
CP1255 - Other insurance 
CP1262 - Other financial services n.e.c. 
CP1271 - Other services n.e.c. (S) 

Study on VAT rates structure 

 
 
145 

A.3 Validation exercise: Comparison with results based on micro data 

Since  we  are  working  with  aggregated  data,  it  is  interesting  to  see  how  our  analysis 
compares to an analysis that is based on household level data. As a validation exercise, 
we  therefore  repeat  our  simulations  using  micro  data  for  a  subgroup  of  countries  for 
which we have access to disaggregated consumption surveys: Austria, Italy and the UK.  

Validation with Micro-Data: Austria 

We repeat our analysis for Austria using the Austrian Household Budget Survey 2005 
as provided by Statistik Austria. This dataset contains detailed expenditure information 
on 8,400 households representative for the Austrian population; annual expenditure data 
are  disaggregated  to the  COICOP  6-digit  level.  In  accordance  with  the  analysis  using 
aggregated data, we uprate expenditure information using the specific growth rate of the 
12  main  COICOP  expenditure  categories  from  2005  to  2011,  disposable  income  is 
uprated using the wage growth rate 2005-2011.  

If we were performing the analysis of this report based on this micro-data, we would 
adjust  household  expenditure  to  take  household  size  into  account.  This  is  typically 
accomplished  by  dividing  expenditure  by  the  modified  OECD  scale115,  making 
expenditures  comparable  across  differently  sized  households.  When  considering  the 
impact of reforms of the VAT structure on income distribution, we would also adjust 
household income by household size before assigning households to income quintiles. 
Because  the  HBS  data  are  apparently  not  equivalised,  we  work  with  unequivalised 
income and expenditure for the sake of comparability.  

115 The modified OECD scale gives a weight of one to the first member of each household, a weight of 0.5 

to every additional adult member and a weight of 0.3 to every child living in the household. This 
approach assumes economies of scale in consumption. A family of two adults and one child would thus 
have to spend 1.8 times as much as a single person to be considered as having the same “equivalised” 
expenditure; see 
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Equivalised_disposable_income 
[13/03/25] 

TAXUD/2012/DE/323 

 
                                                      
Table 41: Comparison of estimates of VAT bills, in absolute values and as a percentage of 
total  expenditure,  by  COICOP  category,  estimated  on  aggregate  HBS  data  as  in  this 
report, and micro-HBS data, for Austria  

146 

COICOP  
(2-digit) 

Absolute deviation 
from micro result 
(in €) 

Deviation from micro 
result as a fraction of 
total VAT payments 

Absolute difference in 
VAT paid per 
household expenditure 
-0.0%p 
CP01 
-0.0%p 
CP02 
-0.0%p 
CP03 
-0.0%p 
CP04 
-0.0%p 
CP05 
+0.0%p 
CP06 
+0.2%p 
CP07 
-0.0%p 
CP08 
+0.1%p 
CP09 
+0.0%p 
CP10 
+0.0%p 
CP11 
+0.0%p 
CP12 
Sum 
+0.2%p 
Source:  Konsumerhebung  2004/05  (Statistik  Austria),  Household  Budget  Surveys,  National  Accounts 

+0.0% 
+0.0% 
+0.0% 
-0.1% 
-0.0% 
+2.0% 
+6.8% 
-0.0% 
+4.3% 
+0.0% 
+8.0% 
+2.0% 
+2.8% 

0 
0 
0 
-1 
0 
1 
66 
0 
23 
0 
20 
5 
114 

(Eurostat), own calculations. 

Table  41  shows  the  results  of  a  comparison  between  the  VAT  paid  by  an  average 
household,  by  the  12  main  COICOP  categories,  as  calculated  from  the  micro-  and 
aggregated data, respectively. These results show a very good correspondence between 
the  two  datasets:  the  biggest  discrepancy  in  absolute  VAT  payments  occurs  in  the 
category transport (CP07); the deviation as a percentage of average expenditure on this 
expenditure  category  is  6.8 %.  In  relation  to  total  VAT  payments,  we  observe  the 
largest  difference  in  the  category  CP11  “Restaurants  and  hotels”,  8 %.  Nevertheless, 
this analysis gives us confidence that our aggregated data is overall sound. 

Comparing  the  more  detailed  results,  differences  between  the  results  based  on micro- 
and aggregated data emerge. Table 42 presents the deviations of the main results from 
the  micro-data  results  in  the  same  fashion  as  Table  41,  but  with  VAT  bills  and 
expenditure disaggregated by income quintile. 

From  Table  42,  it  is  clear  that  there  are  some  problems  with  the  association  of 
households to income quintiles in the aggregated data. First, VAT paid is higher for the 
first income quintile than for the second income quintile, which could be justified by a 

Study on VAT rates structure 

 
 
 
147 

larger  household  size  for  lower  income  households,  as  households  with  children  are 
often younger and therefore have less disposable income. However, this story is refuted 
by the micro-results, which show a steady increase of VAT paid by quintiles. Moving 
from the first income quintile to the second, the average VAT bill increases by about 
€ 900, from the second quintile to the third,  it increases by about € 800, moving from 
the third to the fourth it increases by € 1,200, while it only rises by about € 400 moving 
from  the  fourth  quintile  to  the  fifth  in  the  results  based  on  micro  data.  In  the  results 
based on the aggregated data, however, VAT paid is € 141 lower in the second quintile 
than in the first, increases moderately moving from the second to the third and from the 
third to  the fourth income  quintile (by  about  € 700  and  € 600,  respectively),  and  then 
rises sharply from the fourth to the fifth income quintile (about € 1,200). In comparison, 
this pattern of increase is much smoother in the results based on micro data.  

Also, the expenditure categories do not quite seem to add up: for example, expenditure 
on  category  CP07  “Transport”  is  a  category  that  sees  rapid  growth  over  the  income 
quintiles. In the micro data results, households in the first quintile pay € 250 VAT for 
goods and services in that category per year, while households in the fifth quintile pay 
€ 1,431.  The  average  VAT  rate  for  the  lowest  income  quintile  in  this  category  is 
17.2 %,  while  the  richest households  pay  an  average  VAT  rate  of  18 %,  suggesting  a 
higher  share  of  (standard  rated)  private  means  of  transport  as  compared  to  (reduced 
rated) public transport in the highest income quintile. In the results based on aggregated 
data,  however,  households  in  the  first  quintile  have  a  higher  average  VAT  rate  on 
transport goods and spend more on transport than in the second quintile. This suggests 
that  individuals  might  be  incorrectly  sorted  into  income  categories  in  the  aggregated 
data.  

TAXUD/2012/DE/323 

 
 
148 

Table 42: Comparison of estimates of VAT bills, in absolute values and as a percentage of total expenditure, by income quintile and COICOP category, 
estimated on aggregate HBS data as in this report, and micro-HBS data, for Austria  

Absolute 
deviation from 
micro result 
(in €) 

First Income Quintile  
Deviation 
from micro 
result as a 
fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure 

Absolute 
deviation from 
micro result 
(in €) 

Second Income Quintile 
Deviation 
from micro 
result as a 
fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure 

Absolute 
deviation from 
micro result 
(in €) 

Third Income Quintile 
Deviation 
from micro 
result as a 
fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure 

144 
34 
111 
75 
106 
15 
479 
24 
175 
0 
55 
32 
1,250 

+32.8% 
+22.2% 
+42.6% 
+13.6% 
+36.4% 
+41.8% 
+65.7% 
+22.5% 
+44.8% 
+0.0% 
+30.3% 
+17.0% 
+37.6% 

-0.1%p 
-0.1%p 
+0.1%p 
-0.7%p 
-0.0%p 
+0.0%p 
+1.1%p 
-0.1%p 
+0.2%p 
+0.0%p 
-0.1%p 
-0.2%p 
+0.0%p 

79 
3 
7 
40 
33 
-4 
41 
1 
-3 
0 
-7 
12 
204 

+18.3% 
+2.1% 
+3.2% 
+6.9% 
+11.7% 
-8.5% 
+6.5% 
+1.2% 
-0.8% 
+0.0% 
-4.2% 
+6.5% 
+6.4% 

+0.2%p 
-0.0%p 
-0.0%p 
+0.0%p 
+0.1%p 
-0.0%p 
+0.0%p 
-0.0%p 
-0.1%p 
+0.0%p 
-0.1%p 
+0.0%p 
+0.0%p 

17 
6 
38 
-52 
-6 
7 
50 
8 
35 
0 
20 
-48 
76 

+3.7% 
+3.8% 
+12.3% 
-8.7% 
-1.8% 
+12.4% 
+5.5% 
+6.7% 
+7.2% 
+0.0% 
+9.2% 
-22.2% 
+2.0% 

+0.0%p 
+0.0%p 
+0.1%p 
-0.2%p 
-0.0%p 
+0.0%p 
+0.1%p 
+0.0%p 
+0.1%p 
+0.0%p 
+0.1%p 
-0.1%p 
+0.2%p 

COICOP 
(2-digit) 

CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
CP11 
CP12 
Sum 

TAXUD/2012/DE/323 

  
 
 
149 

COICOP 
(2-digit) 

CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
CP11 
CP12 

Sum 

Absolute 
deviation from 
micro result  
(in €) 

Fourth Income Quintile 
Deviation 
from micro 
result as a 
fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure 

Absolute 
deviation from 
micro result  
(in €) 

Fifth Income Quintile 
Deviation 
from micro 
result as a 
fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure 

-119 
13 
-106 
-28 
-104 
1 
-58 
-15 
-128 
0 
30 
-17 

-532 

-26.2% 
+7.1% 
-34.1% 
-4.1% 
-25.9% 
+1.7% 
-5.1% 
-11.9% 
-22.1% 
+0.0% 
+10.9% 
-7.3% 

-12.0% 

-0.1%p 
+0.1%p 
-0.1%p 
+0.2%p 
-0.1%p 
+0.0%p 
+0.2%p 
+0.0%p 
-0.1%p 
+0.0%p 
+0.2%p 
+0.0%p 

+0.3%p 

-184 
-47 
14 
24 
36 
11 
38 
-19 
200 
0 
85 
102 

260 

-39.9% 
-25.5% 
+3.4% 
+3.0% 
+6.9% 
+13.4% 
+2.6% 
-15.5% 
+24.3% 
+0.0% 
+21.8% 
+28.6% 

+4.6% 

-0.4%p 
-0.1%p 
+0.0%p 
+0.0%p 
+0.1%p 
+0.0%p 
+0.0%p 
-0.0%p 
+0.4%p 
+0.0%p 
+0.2%p 
+0.2%p 

+0.3%p 

Source: Konsumerhebung 2004/05 (Statistik Austria), Household Budget Surveys, National Accounts (Eurostat), own calculations. 

TAXUD/2012/DE/323 

  
 
150 

While  the  results  from  the  two  data  sources  are  roughly  in  line  if  disaggregated  by 
number  of  active  persons 
in  the  household,  large  differences  emerge  when 
disaggregated  by  household  type.  Average  VAT  paid  per  household  is  much  more 
dispersed  in  the  results  based  on  micro  data  than  in  the  results  based  on  aggregated 
data. Here, it is worth re-emphasising that the calculation of VAT is performed without 
equalisation  of  any  kind,  that  is,  we  calculate  average  VAT  payments  per  household 
without considering household size; while when working with household level data, it 
is  often  customary  to  divide  both  household  incomes  and  expenditure  through  EU-
equivalence scales that make income and expenditure of households of different sizes 
comparable.  One  possible  explanation  for  this  discrepancy  is  therefore,  that  Eurostat 
already  performed  some  equalization  on  household  size  in  the  data,  generating  more 
evenly  distributed  expenditure  patterns  across  household  types.  This  must  have  been 
done on the data disaggregated by household type and not on the data disaggregated by 
the number of household members who are active on the labour market.  

Validation with Micro-Data: Italy 

For the analysis of the distributive impact of the VAT system based on micro-data for 
Italy,  we  use  the  2005  Household  Budget  Survey.  This  survey  contains  detailed 
information on expenditure patterns, but lacks data on household income. We therefore 
have  to  impute  disposable  income  into  this  dataset.  This  information  comes  from  the 
Italian  SILC  for  2006,  that  contains  income  information  for  2005,  as  well  as  socio-
demographic  data  for  2006.  Since  the  SILC  does  not  contain  any  information  on 
household  consumption,  any  link  between  the  HBS  and  the  SILC  would  have  to  be 
based  solely  on  demographic  variables.  We  did  not  consider  this  to  be  sufficient  to 
provide a consistent relationship between total household income and total expenditure. 
We  therefore  turned  to  the  only  survey  that  collects  data  on  both  income  and  total 
consumption in Italy, the Bank of Italy survey on household income and wealth, which 
is carried out every two years.  

In this survey, we regress the log of total household consumption on disposable income, 
area  of  residence,  profession  and  education  of  the  household  head,  and  number  of 
children  and  adults.  We  use  the  coefficients  of  these  regressions  to  impute  total 
consumption  into  the  SILC.  The  sole  purpose  of  this  imputation  is  to  assign  the 
households  in  the  SILC  to  deciles  of  total imputed  consumption.  After also  assigning 
the households in the HBS to deciles of total consumption, we match each household in 
the  HBS  to  a  household  in  the  SILC  that  belongs  to  the  same  imputed  consumption 
decile,  using  the  STATA  psmatch2  routine  (Leuven  and  Sianesi,  2003).  We  use  the 

Study on VAT rates structure 

 
151 

number  of  workers,  number  of  family  members,  profession  and  gender  of  the  head, 
tenure  status  and  area  of  residence  as  covariates.  Table  43  compares  original  and 
imputed incomes per equivalent income decile in the EU-SILC and HBS.  

Table  43:  Original  and  imputed  incomes  per  equivalent  income  decile  in  the  EU-SILC 
2006 and HBS 2005. 

HBS 2005 

SILC 2006 (2005 incomes) 

Deciles 

Min 

Max 

Min 

Max 

Mean 
6,442 
10,277 
12,714 
14,988 
17,492 
19,568 
22,031 
24,866 
30,171 
48,361 
20,675 

8,810 
8,827 
1 
11,780 
11,551 
2 
13,586 
13,969 
3 
16,146 
16,173 
4 
18,490 
18,402 
5 
20,748 
20,905 
6 
23,111 
23,830 
7 
26,835 
27,766 
8 
34,224 
34,785 
9 
175,551 
549,563 
10 
549,563 
175,551 
Total 
Source: Italian Household Budget Survey 2005, Italian EU-SILC 2006, Bank of Italy Survey on Household 

1 
8,822 
11,781 
13,594 
16,148 
18,491 
20,750 
23,113 
26,887 
34,226 
1 

0 
8,828 
11,551 
13,971 
16,174 
18,403 
20,907 
23,830 
27,768 
34,787 
0 

Mean 
5,969 
10,246 
12,765 
15,088 
17,302 
19,631 
22,310 
25,623 
30,844 
49,533 
20,929 

SD 
2,325 
797 
707 
642 
640 
726 
844 
1,127 
2,012 
21,696 
13,704 

SD 
2,204 
907 
529 
735 
687 
693 
679 
1,084 
2,078 
16,825 
12,602 

Income and Wealth 2006, National Accounts (Eurostat), own calculations. 

Table  44  shows  the  disparities  of  the  overall  VAT  bill  of  private  households  in  Italy 
according to aggregate HBS data and micro data, disaggregated to the COICOP 2-digit 
level. Although the deviation of the results based on aggregate data from those based on 
micro data do not seem too big when looking at the aggregate difference in estimated 
VAT  bills  in  Euro,  the  differences  do  seem  substantial  as  a  proportion  of  VAT 
payments  per  COICOP  category,  although  they  even  out  as  a  sum  (only  1.3 % 
difference in overall VAT payments). The biggest discrepancy emerges in the category 
CP04 “Housing, water, electricity, gas and other fuels” were the aggregate data estimate 
the VAT  bill to be € 89, or 32 %, lower than the micro-data. The aggregate data also 
estimate VAT payments in the category CP09 “Recreation and culture” to be € 41, or 
18 %,  higher  than  the  micro-data;  also  worth  mentioning  is  the  discrepancy  in  the 
category  CP11  “Restaurants  and  hotels”  (€ 21  or  14.1 %  for  the  average  household). 
The € 15 discrepancy in the category CP10 “Education” is due to small discrepancies in 
the assumptions about VAT exempted goods and services between the main analysis on 
aggregated HBS data and the micro validation exercise.116 The absolute differences in 

116 There are some goods and services, like school excursions, which might be subject to VAT, although 
most goods and services belonging to the category CP10 “Education” are exempt from VAT. Because the 
aggregated data on education is of low quality for all Member States including Italy, and the goods and 

TAXUD/2012/DE/323 

 
                                                      
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the  estimate  of  VAT  bills  as  a  fraction  of  household  expenditure  remain  below  0.4 
percentage points for all categories. We use the results based on the HBS micro data for 
Italy  disaggregated  by  income  quintiles  in  the  main  report,  because  the  Italian  HBS 
lacks income information (as discussed above). Because we base our main analysis on 
these data, we naturally cannot provide a micro validation for these.  

The  discrepancies  between  the  results  based  on  aggregate  data  are  more  accentuated 
when households are separated according to the number of members who are active in 
the labour market, and the discrepancies increase with the number of active household 
members. While the estimated household VAT bills are higher in the calculation based 
on  micro  data  for  all  households  with  two  active  members  or  less  (the  discrepancy 
ranges between € 33 for households with no active member to € 67 for households with 
two active members), the micro result estimates a VAT bill that is € 1,015 lower than 
the estimate based on aggregate data for households with three or more active members. 
The  bulk  of  this  discrepancy  comes  from  the  category  transport,  but  the  categories 
CP09 “Recreation and Culture” and CP03 “Clothing and Footwear” also contribute to 
the  difference.  The  fact  that  this  discrepancy  is  concentrated  on  bigger  households  to 
such a degree points to problems with the aggregate data. In the results based on micro 
data, household VAT bills rise more smoothly with the addition of an active adult to the 
household  (roughly  € 1,000  per  active  adult  from  zero  to  two  active  members  of  the 
household,  an  additional  € 500  for  three  active  members  or  more).  In  the  calculation 
based on the aggregate data, on the other hand, the VAT bill follows the same pattern, 
but jumps by nearly € 1,600 euros from the category “two active persons” to “three or 
more”.  

We  observe  the  same  (although  less  accentuated)  pattern  when  looking  at  the 
discrepancies  between  the  results  based  on  aggregate  and  micro  data,  disaggregated 
according  to  household  type.  Households  with  three  or  more  adults,  but  without 
dependent children, show the biggest difference between the calculations (the VAT bill 
estimated with micro data is € 112 higher). Discrepancies are biggest in the categories 
CP07 “Transport” and CP04 “Housing”.  

In  addition  to  possible  equalisation  of  household  expenditures  in  the  HBS  data  from 
Eurostat we are not aware of, which could tilt our results based on aggregate data, also 
the different aggregation of goods and services in the two analyses cause the differing 

services  that  are  likely  to  be  subject  to  VAT  only  make  up  a  small  proportion  of  this  category,  we 
assumed the entire category to be exempt in our analysis of the VAT bills of private households.  

Study on VAT rates structure 

 
 
 
                                                                                                                                              
153 

results for Italy. The micro data for Italy, for example, distinguishes between used cars, 
that  are  zero  rated,  and  new  cars,  that  are  taxed  at  the  standard  rate,  while  our  most 
minute category is “Motor cars” which we assume to be taxed at the standard rate.  

Table 44: Comparison of estimates of VAT bills, in absolute values and as a percentage of 
total  expenditure,  by  COICOP  category,  estimated  on  aggregate  HBS  data  as  in  this 
report, and micro data, for Italy 

COICOP  
(2-digit) 

Absolute deviation 
from micro result 
(in €) 

Deviation from micro 
result as a fraction of 
total VAT payments 

Absolute difference in 
VAT paid per 
household expenditure 
+0.0%p 
+0.0%p 
+0.1%p 
-0.3%p 
-0.0%p 
-0.0%p 
+0.1%p 
+0.0%p 
+0.1%p 

CP01 
CP02 
CP03 
CP04 
CP05 
CP06 
CP07 
CP08 
CP09 
CP10 
-0.1%p 
CP11 
+0.0%p 
CP12 
Sum 
+0.1%p 
Source: Italian Household Budget Survey 2005, Italian EU-SILC 2006, Bank of Italy Survey on Household 
Income and Wealth 2006, Household Budget Surveys, National Accounts (Eurostat), own calculations. 

+0.4% 
+0.0% 
+7.0% 
-32.1% 
-4.0% 
-3.5% 
+5.5% 
+0.2% 
+18.3% 

2 
0 
23 
-89 
-11 
-2 
30 
0 
41 
-15 
-21 
6 
-36 

-14.1% 
+2.8% 
-1.3% 

Validation with Micro-Data: the UK 

The micro-data validation exercise for the UK is based on the Living Costs and Food 
Survey  (LCFS)117  2010;  expenditure  and  income  is  uprated  with  the  nominal  GDP 
growth rate from the relevant reference quarter to the second quarter of 2011.118  

To  incorporate  housing  into  our  measure  of  total  consumption,  rents  for  owner 
occupiers and those living in (subsidised) social housing are imputed based on data on 

117  This  is  the  same  Household  Budget  Survey  the  aggregate  data  published  by  Eurostat  are  based  on; 
however, the Eurostat data is from 2005, at which time the name of the survey was the Expenditure and 
Food Survey (EFS).  

118 Data from the Living Costs and Food Survey are produced by the Office for National Statistics and are 
Crown Copyright. They are reproduced with the permission of the Controller of HMSO and the Queen’s 
Printer for Scotland.  

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rented unfurnished dwellings.119 We exclude cash outlays on housing such as mortgage 
interest payments and capital payments from our measure of consumption, because we 
interpret these items as forms of investment rather than consumption. Instead, we use 
actual  rent  paid  (for  households  renting  privately)  or  imputed  rent  (for  all  other 
households). For owner-occupier households, we add the imputed rental value of their 
property  to  their  income,  and  subtract  mortgage  interest  payments,  for  occupiers  of 
social housing, we also add imputed rent, and subtract actual rent paid. We include the 
rental  income  of  private  landlords  into  our  measure  of  income;  for  those  renting 
privately, no adjustment is needed.120  

Regrettably,  we  do  not  know  how  Eurostat  treat  housing  in  their  definition  of  both 
expenditure and income. That is, we have no knowledge of how rents are imputed and 
if,  and  how,  imputed  rent,  actual  rent  and  mortgage  interest  are  included  in  the 
calculation of both income and consumption for different groups of households (owner-
occupiers,  private  renters,  those  in  social  housing  etc.).  This  is  not  straightforward 
conceptually, and Eurostat might have chosen a very different path from ours. Because 
housing is a very big component of both income and consumption, different approaches 
to  incorporating  it  might  well  lead  to  very  different  results.  Differences  in  the  way 
imputed rent (and housing in general) is dealt with in our analysis based on micro data, 
and by Eurostat, is therefore a prime candidate for explaining the discrepancies between 
the results. We further discuss this point when comparing the results of this study to a 
previously published report dealing with the VAT system, IFS et. al. (2011), in the next 
subsection.  

Unfortunately, we only have estimates on aggregate tax bills of private households, not 
on VAT bills by consumption category as in the cases of Austria and Italy.121 According 

119  In  the  first  stage  of  the  two  stage  procedure,  we  run  a  linear  regression  on  rent  for  privately  rented 
unfurnished property from the 1978 to 2010 waves of the LCFS. We then predict a rental value for all 
households  in  the  2010  wave,  drawing  randomly  from  the  (estimated)  distribution  of  errors.  For 
households  that  are  not  renting  an  unfurnished  property,  we  impute  a  rental  value  by  taking  the  actual 
rental value from the household with the smallest absolute difference in the predicted rental value. The 
covariates in the regression are geographical region, number of rooms, the level of the local (property) tax 
bill, and the education of the household head.  

120 The net income from housing is  always the value a household gets from living in a property over and 
above  the  cash  amount  they  pay  for  doing  so.  In  the  case  of  private  renters,  these  are  the  same,  and 
therefore net out to zero.  

121  The  IFS  tax  microsimulation  model  TAXBEN  is  based  on  consumption  categories  that  do  not 
correspond to the COICOP classification. Mapping the consumption categories of this model to COICOP 
categories is not straightforward, and would imply rewriting a significant part of the code of the micro-
simulation model. 

Study on VAT rates structure 

 
 
                                                      
155 

to the micro-data, the average household in the UK pays € 2,827 of VAT per annum, 
€ 218 or 8.4 % more than in the estimate based on aggregate data (€ 2,609). This is due 
to  the  higher  average  VAT  rate  in  the  calculation  based  on  micro  data:  8.6 %  as 
compared to the estimate based on aggregate data, 8.0 %.  

Table 45: Comparison of estimates of VAT bills, in absolute values and as a percentage of 
total expenditure, by  income quintile, estimated on aggregate HBS data as in this report, 
and micro data, for the UK 

Absolute 
deviation from 
micro result 

Deviation from 
micro result as 
a fraction of 
total VAT 
payments 

Absolute 
difference in 
VAT paid per 
household 
expenditure  

Absolute 
difference in 
average VAT 
rate 

-0.5%p 
First Quintile 
-0.7%p 
Second Quintile 
-1.1%p 
Third Quintile 
-0.8%p 
Fourth Quintile 
-0.4%p 
Fifth Quintile 
Source:  Living  Costs  and  Food  Survey  (LCFS)  2010,  Household  Budget  Surveys,  National  Accounts 

+11.2% 
+4.4% 
-6.3% 
-7.7% 
-20.5% 

-0.5%p 
-0.6%p 
-0.9%p 
-0.7%p 
-0.3%p 

141 
79 
-146 
-239 
-929 

(Eurostat), own calculations. 

Regarding  VAT  payments  by  income  quintile,  the  micro  results  match  the  aggregate 
data  quite  well  for  households  in  quintiles  two  to  four.  For  the  lowest  quintile,  the 
estimate  of  average  aggregate  expenditure  is  significantly  higher  in  the  calculations 
based on aggregate data than in those based on micro data; the difference  amounts to 
€ 3,510 or 17.5 %. The divergence between the estimates of the average VAT bill for 
households  in  the  lowest  income  quintile  however  is  only  € 141  (or  11.2 %);  as  a 
consequence, the average VAT rate is higher in the results based on micro-data. In the 
second  quintile,  the  analysis  based  on  aggregate  data  arrives  at  only  12.2 %  higher 
mean  expenditures  than  the  micro  data;  while  the  estimates  of  the  average  VAT  bill 
nearly  coincide  (with  the  results  based  on  aggregate  data  only  being  € 79,  or  4.4 %, 
higher than the results based on micro data), this results in a higher average VAT rate 
according to the micro data. Although the estimates for average aggregate expenditure 
based  on  aggregate  data  are  closer to those based  on micro  data for  the third and  the 
fourth  income  quintile,  the  differences  in  the  estimated  VAT  bills  between  aggregate 
and micro data are actually bigger. Estimates for average aggregate expenditure differ 
by € 1,624 and € 100 between the estimates based on aggregate and micro-data for the 
third  and  fourth  income  quintiles  respectively.  The  differences  in  average  VAT  bills 
however  are  6.3 %  and  7.7 %  of  the  estimate  based  on  aggregate  data,  with  average 

TAXUD/2012/DE/323 

  
 
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VAT bills being lower according to this calculation. As a consequence, the estimates of 
the  average  VAT  rates  according  to  micro-data  are  higher  than  those  based  on 
aggregate data. There is a rather large deviation of estimated average VAT bills for the 
fifth  income  quintile;  estimates  based  on  aggregate  data  are  € 929  lower  than  those 
based  on  micro-data.  The  main  difference  here  is  the  strikingly  lower  estimate  of 
aggregate  expenditures:  € 8,216  lower  than  the  micro  estimate  (16.2 %).  The  average 
VAT rates are not so far apart, 9.8 % according to aggregate, and 10.2 % according to 
micro  data.  This  of  course  implies  a  much  steeper  increase  in  estimated  expenditure 
moving from the fourth to the fifth income quintile in the results based on micro data 
than in the results based on aggregate data.  

Looking at the results by number of active persons in the household, we see the biggest 
discrepancies for households without an active member, the estimate of the VAT bill of 
households that fit this description are € 324 (or 22.9 %) higher based on the micro than 
on  the  aggregate  data.  For  households  with  one,  two  or  three  active  members,  this 
discrepancy is lower (€ 2115 or 4.7 % and € 264 and 7.5 % higher VAT bills according 
to  micro  data  for  households  with  one  and  two  active  persons,  respectively,  € 145  or 
3.0 %  higher  estimated  VAT  bill  for  households  of  three  or  more  active  persons 
according  to  micro  data).  Also  here,  the  estimate  of  aggregate  expenditure  for 
households  of  three  or  more  active  persons  (who  will  be  classified  as  higher  income 
households, especially without equivalisation of household income) is estimated to be 
significantly lower when the estimate is based on micro data (€ 2,264 or 4.4 %). 

When comparing the results disaggregated by household type, no clear pattern emerges. 
The  largest  difference  between  the  results  occurs  for  households  consisting  of  two 
adults without dependent children, where the estimate of the average VAT bill based on 
micro  data  is  € 427  or  15.5 %  higher  than  the  corresponding  estimate  based  on 
aggregate data.  

Comparison with previous Results (IFS et al., 2011) 

Making use of the results of IFS et al. (2011), we can also perform a limited validation 
exercise for those countries that are covered in this study: Belgium, Germany, Greece, 
Spain, France, Italy, Hungary, Poland and the UK. Because the definition of household 
types in IFS et al. (2011) is not comparable with the household type definition in our 

Study on VAT rates structure 

 
 
157 

analysis,  we  only  compare  VAT  paid  as  a  percentage  of  household  expenditure  by 
income quintile (which we calculate from the income deciles presented in the report).122  

The degree of concurrence between our results and the results in IFS et al. (2011) varies 
between  countries.  For  Belgium,  we  arrive  at  consistently  higher  estimates  for  the 
fraction of total household expenditure that accrues to VAT payments. The difference is 
the  largest  for  the  third  income  quintile,  where  it  amounts  to  1.5  percentage  points 
(18 % of the fraction estimated in IFS et al. (2011)).  

Our  results for  Germany  coincide  very  well  with the  results in  IFS  et  al.  (2011). The 
fraction  of  total  expenditure  spent  on  VAT  is  the  same  in  both  studies  for  the  third 
income quintile, and our results lie only between 0.1 and 0.3 percentage points below 
the  results  in  IFS  et  al.  (2011)  (as  a  percentage  of  the  estimated  VAT  liability  in  the 
cited study, the divergence is the greatest for the richest quintile of households, where it 
is 3.5 %, with our estimated fraction being lower).  

There  is  quite  a  bit  of  divergence  between  our  estimates  of  VAT  payments  as  a 
percentage of expenditure and the percentages estimated in IFS et al. (2011) for Greece: 
our results show significantly less variation over the income distribution – we estimate 
households  in  the  first  income  quintile  to  spend  10.4 %,  and  households  in  the  fifth 
income quintile 10.5 % of their total expenditure on VAT, while in the IFS et al. (2011) 
study, the poorest households spend 12.5 %, and the richest households 13.5 % of their 
total expenditure on VAT. As a percentage of the fraction estimated in IFS et al. (2011), 
the divergence is greatest for the richest quintile of households, 21.9 %.  

For  Spain,  our  estimates  of  VAT  payments  as  a  fraction  of  total  expenditure  are 
consistently 0.6 to 0.8 percentage points below those published in IFS et al. (2011); the 
absolute  deviation  is  highest  in  the  richest  income  quintile  (0.9  percentage  points,  or 
11.8 % of the fraction estimated in IFS et al. (2011)).  

For France, our results and the results in IFS et al. (2011) nearly coincide for the first 
income  quintile  (ours  are  0.1  percentage  point  higher),  but  are  between  0.7  and  0.9 
percentage points above their estimates for income quintiles two to five. This is because 
we estimate the VAT liability as a percentage of expenditure to steadily increase with 

122  We  do  not  compare  our  new  budget-closing  standard  VAT  rate  from  scenario  2  with  its  counterpart 
from IFS et al. (2011), because our estimate of this rate includes VAT payments from non-households, 
while IFS et al. (2011) only consider households.  

TAXUD/2012/DE/323 

 
 
 
 
 
                                                      
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income – from 7.6 % for the poorest quintile of households to 8.6 % for the richest  – 
while  IFS  et  al.  (2011)  arrive  at  a  quite  uniform  fraction  of  VAT  payments  of  total 
expenditures (around 7.5 %). The divergence is the greatest for the fifth quintile, where 
it amounts to 12 % of the estimated VAT ratio in IFS et al. (2011).  

For  Italy,  our  results  are  quite  well  aligned  with  the  results  published  in  IFS  et  al. 
(2011) (recall that for Italy, data on disposable income, and hence association to income 
quintiles,  is  imputed from  the  EU-SILC,  and  that  we  compare  results  based  on micro 
data to those of the former study). In comparison to VAT bills as a percentage of total 
expenditures as estimated in IFS et al. (2011), we underestimate the average VAT bill 
in the first income quintile by 0.6 percentage points (8.3 % of the ratio published in IFS 
et  al.  (2011)),  and  overestimate  the  average  VAT  bill  of  households  in  the  highest 
income  quintile  by  0.4  percentage  points  (4.7 %  of  the  ratio  published  in  IFS  et  al. 
(2011)). For quintiles two to four, we are very close to IFS et al. (2011) (the divergence 
being  -0.1 %p,  0.2 %p  and  0.3 %p  respectively).  Overall,  VAT  bills  as  a  fraction  of 
expenditure rise more steeply in our calculations, from 7 % for the first income quintile 
to 9.3 % for the fifth income quintile, while IFS et al. (2011) arrive at an estimation of 
7.7 % for the first, and 8.9 % for the fifth quintile.  

In the case of Hungary, we estimate a higher fraction of expenditure spent on VAT for 
households in income quintiles one to three (0.7 to 0.2 percentage points higher), and a 
lower fraction being spent on VAT for the deciles four and five (0.4 and 1.1 percentage 
points  lower,  respectively).  As  a  percentage  of  the  fraction  estimated  in  IFS  et  al. 
(2011),  the  biggest  divergence  occurs  in  the  richest  income  quintile  (our  results  are 
6.2 % lower than those in IFS et al. (2011)).  

Our results for Poland differ quite substantially from the results published in IFS et al. 
(2011).  We  estimate  consistently  higher  VAT  payments  as  a  fraction  of  total 
expenditure,  the  difference  ranges  between  1.4  percentage  points  for  the  first  income 
quintile (17.1 % of the ratio estimated in the IFS et al. (2011) study) and 2 percentage 
points (22.6 % of the ratio estimated in the cited study) in the fourth income quintile.  

As for the UK, the distributional effect of VAT is more progressive in our results than 
in IFS et al. (2011): according to our results, VAT payments as a percentage of average 
expenditure  rise  fairly  smoothly  from  6.3 %  in  the  first  quintile  to  8.9 %  in  the  fifth 
quintile;  whereas  in  IFS  et  al.  (2011),  they  are  almost  constant  over  the  income 
distribution,  with  VAT  payments  per  expenditure  ranging  between  8.6 %  in  the  first 
income quintile and 9.1 % in the fifth, see Table 46. IFS et al. (2011) worked with both 

Study on VAT rates structure 

 
 
 
 
159 

equivalised  income  and  expenditures,  while  the  micro  results  in  this  section  use  raw 
data not adjusted for household size. We are not sure whether the aggregated HBS data 
provided by Eurostat is equivalised, but do not assume it is. As can be seen from Table 
46,  if  we  equivalise  income  and  expenditures  in  the  micro  data,  UK’s  VAT  structure 
seems to be less progressive – especially for the first quintile, VAT bills as a percentage 
of  expenditure  increase  considerably.  The  micro  results  are  furthermore  based  on 
reported income, while IFS et al. (2011) use modelled income. Re-running our micro-
validation  exercise  with  modelled  income  and  equivalisation,  the  results  look  much 
more like IFS  et al. (2011). That is, the definition of income and equivalisation alone 
can  lead  to  a  quite  different  overall  assessment  of  the  VAT  structure  in  the  UK 
(proportional  with  equivalisation  and  modelled 
income,  progressive  without 
equivalisation  and  self-reported  income).  As  mentioned  above,  we  think  that  using 
equivalised  data  is  more  appropriate  for  distributive  analysis,  while  the  choice  of 
income  concept  is  less  straightforward.  However,  this  comparison  is  instructive  as  it 
clearly  shows  the  importance  of  choices  made  regarding  data  preparation  and 
presentation; that we do not have information about these choices made by Eurostat is a 
severe limitation of this study.  

Table  46:  Comparison  of  estimates  of  VAT  bills  as  a  percentage  of  total  expenditure,  by 
income quintile, as in IFS et al. (2011), estimated on aggregate data and micro data, taking 
into account different concepts of equivalisation and income definition 

Quintile 

IFS et al. 
(2011) 

Aggregate 
results  

Micro 
results (this 
report) 

Micro results 
with modelled 
income and 
equivalisation 
8.5% 
8.3% 
8.3% 
9.0% 
8.8% 
Source:  IFS  et  al.  (2011),  Living  Costs  and  Food  Survey  (LCFS)  2010,  Household  Budget  Surveys, 

Micro results 
with 
equivalisation 

8.6% 
8.3% 
8.6% 
8.6% 
9.1% 

6.3% 
7.1% 
7.7% 
8.4% 
8.9% 

7.6% 
8.1% 
8.8% 
9.0% 
8.9% 

6.8% 
7.8% 
8.7% 
9.0% 
9.2% 

1 
2 
3 
4 
5 

National Accounts (Eurostat), own calculations. 

The conclusion we draw from this validation exercise is, that overall, our data appear to 
be of sound quality, especially when looking at coarse categories of goods and services. 
For  finer  sub-categories,  our  data  becomes  less  reliable,  and  the  association  with  the 
appropriate VAT rates becomes problematic. This is especially the case if key features 
of the data collection, aggregation and presentation are not known. We could not find 
out whether and if so, how, the HBS data were adjusted by household size by Eurostat. 

TAXUD/2012/DE/323 

 
160 

Having  said  that,  very  detailed  categories  of  goods  and  services  might  be  especially 
prone to measurement error, also in the best of micro datasets. This is because even the 
highest  quality  household  surveys  question  households  only  for  a  limited  period  of 
time,  and  then  impute  expenditures  over  the  year.  Even  if  households  are  asked 
specifically  about  more  infrequent  purchases,  this  information  is  less  reliable  than 
expenditures  that  are  recorded  on  a  daily  basis.  This  is  especially  problematic  for 
specialised  items  that  are  not  consumed  at  all  by  a  large  fraction  of  households,  and 
consumed rarely by those who do consume them.  

Study on VAT rates structure 

 
161 

A.4 VAT  reductions  on  expenditure  categories  potentially  in  conflict  with  other 

EU policies  

The second guiding principle of the review of the current VAT rates structure calls for 
an  “Abolition  of  reduced  rates  on  goods  and  services  for  which  the  consumption  is 
discouraged by other EU policies. This could notably be the case for goods and services 
harmful to the environment, health and welfare” (European Commission 2011b, p. 11). 
Categories that have been identified to be both containing products and services that are 
eligible  for  reduced  VAT  rates  and  are  potentially  in  conflict  with  other  EU  policies 
trying  to  reduce  or  change  their  consumption  are  Water,  Energy  products,  Street 
cleaning,  refuse  collection  and  waste  treatment  and  Housing.  Table  47  shows  the 
average increase in VAT payments of private households in the EU-27 countries, if all 
products and services that fall into these categories and are currently taxed at a zero or 
reduced rate were taxed at the standard rate, while reductions were kept in place for all 
other  expenditure  categories.  Put  differently,  Table  47  shows  the  contribution  these 
specific  categories  make  to  the  overall  VAT  increases  in  scenario  1  (abolition  of  all 
zero and reduced rates). For ease of comparison, average VAT bill increases in scenario 
1  can  also  be  found  in  the  table.  To  estimate  the  additional  VAT  burden  of  private 
households, we included the following categories:  
CP0432 - Services for the maintenance and repair of the dwelling123 
CP0441 - Water supply 
CP0442 - Refuse collection 
CP0444 – Other services relating to the dwelling n.e.c124 
CP0451 – Electricity 
CP0452 - Gas.  
CP0454 – Solid fuels 
CP0455 – Heat energy  

123 Renovation and repairing of private dwellings can be taxed at a zero or reduced rates, if materials do not 
account  for  a  significant  part  of  the  value  of  the  service  (see  the  VAT  directive,  http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:347:0001:0118:en:PDF  [2013/10/7],  Annex  II, 
category  (10a).  Because  high  value  materials  are  not  eligible  for  reduced  rates,  including  this  category 
means  that  additional  VAT  payments  for  private  households  might  be  overestimated  (the  estimated 
additional payment is an upper bound).  

124  The  average  VAT  rate  on  this  category  is  only  in  Austria  significantly  lower  than  the  standard  rate 

(10 % vs. 20 %).  

Study on VAT rates structure 

                                                      
162 

Note that not all of these categories are eligible for reduced VAT rates in their entirety. 
In the category Gas, only natural gas is eligible for a reduced rate; in the category Solid 
fuels, only firewood may be taxed at a reduced rate; and in the category Heat energy, 
only district heating may be taxed at a reduced rate. Here we assume the same fraction 
of goods and services that is eligible for a VAT rate reduction within each category as 
we do in the household analysis in section 2of this study; for the specific assumptions 
see the Addendum delivered with this report (section 29).   

Table 47: Abolition of zero and reduced rates for the categories Water, Energy products, 
Street cleaning, refuse collection and waste treatment, Housing 

VAT bill (in % of expenditure) 

VAT bill in € 

2011 

Scenario 1 

Country 

2011 

Scenario 1 

Increase 
due to 
Water, 
Energy etc.  
+0.1%p 
+0.0%p 
+0.2%p 
+0.0%p 
+0.1%p 
+0.0%p 
+0.5%p 
+0.1%p 
+0.6%p 
+0.3%p 
+0.5%p 
+0.2%p 
+0.0%p 
+0.0%p 
+0.3%p 
+0.0%p 
+0.3%p 
+0.1%p 
+0.2%p 
+0.4%p 
+0.6%p 
+0.0%p 
+0.2%p 
+0.0%p 
+0.0%p 
+0.0%p 
+0.7%p 
+0.2%p 

10.0% 
12.9% 
12.1% 
13.3% 
9.2% 
12.7% 
11.5% 
7.2% 
8.3% 
8.9% 
8.6% 
6.8% 
15.3% 
14.7% 
6.2% 
17.5% 
10.0% 
7.7% 
11.4% 
10.6% 
9.0% 
17.8% 
10.5% 
13.7% 
11.0% 
11.7% 
8.0% 
11.0% 

BE 
BG 
CZ 
DK 
DE 
EE 
EL 
ES 
FR 
IE 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
AT 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
EU-27 
Source: Household Budget Surveys, National Accounts (Eurostat), own calculations. 
Note: Exchange rates of 1.956 Bulgarian levs, 24.590 Czech koruny, 7.451 Danish kroner, 0.706 Latvian 
lats, 3.453 Lithuanian litai, 279.370 Hungarian forints, 4.121 Polish zloty, 4.212 Romanian lei, 9.030 

+2.7%p 
+0.1%p 
+2.4%p 
+0.1%p 
+1.7%p 
+0.3%p 
+2.6%p 
+3.1%p 
+3.5%p 
+3.6%p 
+3.3%p 
+2.3%p 
+0.5%p 
+0.5%p 
+2.9%p 
+1.1%p 
+4.2%p 
+2.6%p 
+2.8%p 
+4.8%p 
+4.3%p 
+0.8%p 
+2.5%p 
+0.3%p 
+2.1%p 
+2.2%p 
+3.0%p 
+2.2%p 

+1,156 
+3 
+294 
+41 
+631 
+35 
+925 
+920 
+1,311 
+1,719 
+1,175 
+903 
+57 
+53 
+2,006 
+96 
+1,122 
+957 
+1,164 
+528 
+1,002 
+45 
+656 
+37 
+926 
+958 
+1,108 
+734 

3,735 
639 
1,275 
5,035 
3,078 
1,139 
3,521 
1,914 
2,767 
3,684 
2,682 
2,417 
1,595 
1,275 
3,841 
1,303 
2,321 
2,548 
4,089 
988 
1,827 
853 
2,426 
1,591 
4,105 
4,355 
2,609 
2,504 

Increase 
due to 
Water, 
Energy etc. 
+32 
+0 
+28 
+12 
+28 
+0 
+165 
+37 
+210 
+122 
+180 
+67 
+0 
+0 
+170 
+0 
+77 
+24 
+95 
+43 
+137 
+0 
+53 
+0 
+0 
+0 
+242 
+64 

Study on VAT rates structure 

163 

A.5 WIOD Classifications of products and sectors 

Table 48: WIOD Classification of sectors 

CPA 
code 
A01 
A02 
B05 
CA10 

CA11 

CA12 
CB13 
CB14 
DA15 
DA16 
DB17 
DB18 

DC19 

DD20 

DE21 
DE22 
DF23 
DG24 
DH25 
DI26 
DJ27 
DJ28 
DK29 
DL30 
DL31 
DL32 
DL33 
DM34 
DM35 
DN36 
DN37 
E40 
E41 
F45 

Description 

 Agriculture, hunting and related service activities 
 Forestry, logging and related service activities 
 Fishing, fish farming and related service activities 
 Mining of coal and lignite; extraction of peat 
 Extraction of crude petroleum and natural gas; service activities incidental to oil and gas 
extraction, excluding surveying 
 Mining of uranium and thorium ores 
 Mining of metal ores 
 Other mining and quarrying 
 Manufacture of food products and beverages 
 Manufacture of tobacco products 
 Manufacture of textiles 
 Manufacture of wearing apparel; dressing and dyeing of fur 
 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and 
footwear 
 Manufacture of wood and of products of wood and cork, except furniture; manufacture of 
articles of straw and plaiting materials 
 Manufacture of pulp, paper and paper products 
 Publishing, printing and reproduction of recorded media 
 Manufacture of coke, refined petroleum products and nuclear fuel 
 Manufacture of chemicals and chemical products 
 Manufacture of rubber and plastic products 
 Manufacture of other non -metallic mineral products 
 Manufacture of basic metals 
 Manufacture of fabricated metal products, except machinery and equipment 
 Manufacture of machinery and equipment n.e.c. 
 Manufacture of office machinery and computers 
 Manufacture of electrical machinery and apparatus n.e.c. 
 Manufacture of radio, television and communication equipment and apparatus 
 Manufacture of medical, precision and optical instruments, watches and clocks 
 Manufacture of motor vehicles, trailers and semi-trailers 
 Manufacture of other transport equipment 
 Manufacture of furniture; manufacturing n.e.c. 
 Recycling 
 Electricity, gas, steam and hot water supply 
 Collection, purification and distribution of water 
 Construction 

Study on VAT rates structure 

164 

G50 
G51 
G52 
H55 
I60 
I61 
I62 
I63 
I64 
J65 
J66 
J67 
K70 
K71 
K72 
K73 
K74 
L75 
M80 
N85 
O90 
O91 
O92 
O93 
P95 

 Sale, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel 
 Wholesale trade and commission trade, except of motor vehicles and motorcycles 
 Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods 
 Hotels and restaurants 
 Land transport; transport via pipelines 
 Water transport 
 Air transport 
 Supporting and auxiliary transport activities; activities of travel agencies 
 Post and telecommunications 
 Financial intermediation, except insurance and pension funding 
 Insurance and pension funding, except compulsory social security 
 Activities auxiliary to financial intermediation 
 Real estate activities 
 Renting of machinery and equipment without operator and of personal and household goods 
 Computer and related activities 
 Research and development 
 Other business activities 
 Public administration and defence; compulsory social security 
 Education 
 Health and social work 
 Sewage and refuse disposal, sanitation and similar activities 
 Activities of membership organizations n.e.c. 
 Recreational, cultural and sporting activities 
 Other service activities 
 Activities of households as employers of domestic staff 

Study on VAT rates structure 

 
165 

Table 49: WIOD Classification of products 

Description 

WIOD 
sector 
codes 
Agriculture, Hunting, Forestry and Fishing 
AtB 
Mining and Quarrying 
C 
Food, Beverages and Tobacco 
15t16 
Textiles and Textile Products 
17t18 
Leather, Leather and Footwear 
19 
Wood and Products of Wood and Cork 
20 
Pulp, Paper, Paper , Printing and Publishing 
21t22 
Coke, Refined Petroleum and Nuclear Fuel 
23 
Chemicals and Chemical Products 
24 
Rubber and Plastics 
25 
Other Non-Metallic Mineral 
26 
Basic Metals and Fabricated Metal 
27t28 
Machinery, Nec 
29 
Electrical and Optical Equipment 
30t33 
Transport Equipment 
34t35 
36t37  Manufacturing, Nec; Recycling 
E 
F 
50 
51 
52 
H 
60 
61 
62 
63 
64 
J 
70 
71t74 
L 
M 
N 
O 
P 

Electricity, Gas and Water Supply 
Construction 
Sale, Maintenance and Repair of Motor Vehicles and Motorcycles; Retail Sale of Fuel 
Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles 
Retail Trade, Except of Motor Vehicles and Motorcycles; Repair of Household Goods 
Hotels and Restaurants 
Inland Transport 
Water Transport 
Air Transport 
Other Supporting and Auxiliary Transport Activities; Activities of Travel Agencies 
Post and Telecommunications 
Financial Intermediation 
Real Estate Activities 
Renting of M&Eq and Other Business Activities 
Public Admin and Defence; Compulsory Social Security 
Education 
Health and Social Work 
Other Community, Social and Personal Services 
Private Households with Employed Persons 

A.6 GTAP and WorldScan Classifications and Aggregations 

Study on VAT rates structure 

Table 50: GTAP sectors and WorldScan intermediate and final sectoral aggregations 

166 

WS 9 

Paddy rice 

GTAP 
Code 
PDR 

GTAP Description  WS 36 

Cereal grains nec 
Vegetables & fruits 
Oil seeds 
Sugar cane 
Plant-based fibers 
Crops nec 
Bovine cattle  
Animal prods. nec 
Raw milk 

Intermediate 36-
sector aggregation 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Agriculture 
AGO 
AGR 
Forestry 
AGO 
FRS 
Fishing 
AGO 
FSH 
Coal 
ENG 
COA 
Oil and gas 
AGO 
OIG 
Oil and gas 
ENG 
OIG 
Other mining 
LTM 
OMN 
Processed food 
LTM 
PFD 
Processed food 
LTM 
PFD 
Processed food 
Vegetable oils & fats  PFD 
LTM 
Processed food 
Dairy products 
LTM 
PFD 
Processed food 
Processed rice 
LTM 
PFD 
Processed food 
Sugar 
LTM 
PFD 
Processed food 
Food products nec 
LTM 
PFD 
Beverages & tobacco  LTM 
Beverages & tobacco  B_T 
Textiles 
Textiles 
LTM 
TEX 
WAP  Wearing apparel 
LTM 

1 
2  WHT  Wheat 
3  GRO 
4  V_F 
5  OSD 
6  C_B 
7 
PFB 
8  OCR 
9  CTL 
10  OAP 
11  RMK 
12  WOL  Wool 
13  FRS 
14  FSH 
15  COA 
16  OIL 
17  GAS 
18  OMN  Minerals nec 
Bovine meat prods. 
19  CMT 
20  OMT  Meat products nec 
21  VOL 
22  MIL 
23  PCR 
24  SGR 
25  OFD 
26  B_T 
27  TEX 
28  WAP  Wearing apparel 

Forestry 
Fishing 
Coal 
Oil 
Gas 

Final 9 sector 
aggregation 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Agric. & mining 
Energy 
Agric. & mining 
Energy 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 

Study on VAT rates structure 

 
 
 
167 

I_S 

Ferrous metals 

Metal products 

Leather products 

Leather products 

BMT 
BMT 
FMP 

Basic metals  
Basic metals  
Metal products 

LEA 
LUM  Wood products 

Low tech. manuf. 
Low tech. manuf. 
Low tech. manuf. 
Energy 

Paper prods. & publ.  PPP 
Petroleum & coke 
P_C 
Chemical & plastic 
CRP 

29  LEA 
LTM 
30  LUM  Wood products 
LTM 
Paper prods. & publ.  LTM 
31  PPP 
Petroleum & coke 
32  P_C 
ENG 
33  CRP 
Chemical & plastic  MHM  Medium-high tech. 
34  NMM  Mineral products nec  NMM  Mineral products nec  MLM  Medium-low tech. 
MLM  Medium-low tech. 
35 
MLM  Medium-low tech. 
36  NFM  Metals nec 
37  FMP 
MLM  Medium-low tech. 
38  MVH  Motor vehic. & parts  MVH  Motor vehic. & parts  MHM  Medium-high tech. 
Transport equip. nec  MHM  Medium-high tech. 
39  OTN 
Transport equip. nec  OTN 
40  ELE 
High tech. Manuf. 
Electronic equip. 
Electronic equip. 
ELE 
HTM 
OME  Mach. & equip. nec  MHM  Medium-high tech. 
41  OME  Mach. & equip. nec 
OMF  Manufactures nec 
42  OMF  Manufactures nec 
43  ELY 
ELG 
44  GDT 
ELG 
WTR  Water 
45  WTR  Water 
46  CNS 
CNS 
47  TRD 
TRD 
48  OTP 
OTP 
WTP  Water transport 
49  WTP  Water transport 
50  ATP 
ATP 
51  CMN 
CMN 

Low tech. manuf. 
Energy 
Energy 
Other services 
Commercial serv. 
Commercial serv. 
Transport 
Transport 
Transport 
Commercial serv. 

LTM 
ENG 
ENG 
OSR 
OCS 
OCS 
TRA 
TRA 
TRA 
OCS 

Construction 
Trade 
Transport nec 

Construction 
Trade 
Transport nec 

Electricity 
Gas manuf. & distr. 

Electricty & gas 
Electricty & gas 

Air transport 
Communication 
Financial services 
nec 
Insurance 
Business services 
nec 
Recreat. & other 
serv. 
Public services 

52  OFI 

53 

ISR 

54  OBS 

55  ROS 

56  OSG 

Air transport 
Communications 
Financial services 
nec 
Insurance 
Business services 
nec 
Recreat. & other 
serv. 
Public serv. 
Recreat. & other 
serv. 

OFI 

ISR 

OBS 

ROS 

OSG 

ROS 

OCS 

OCS 

OCS 

OSR 

OSR 

OSR 

Commercial serv. 

Commercial serv. 

Commercial serv. 

Other services 

Other services 

Other services 

57  DWE 

Dwellings 

TAXUD/2012/DE/323 

 
 
168 

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