One of the more interesting points raised by the current governing party in its pre-election program and campaign was the promise that the state would return part of VAT back to the consumers. This promise was repeated multiple times after elections, ostensibly a sign that it was more than just a simple campaign manipulation, and that the government is seriously considering its implementation. The plan for now is to run it as a pilot project in a few regions in the second part of 2018, and then implement it fully throughout the country early next year.
Besides the stated aim of returning money to the private sector and taxpayers pockets, an equally important goal of the measure is to raise more money through VAT as consumers start to request fiscal receipts for their purchases and thus help to supress the grey economy. In various forms it has by now been announced that consumers will get back 15% of what they paid in VAT, and the government claims that an average family will thus receive a rebate of around 500 Euros per year. It is expected that the measure will fill state coffers with an additional 300 million Euros per year through this additional VAT income.
Theory aside, this measure such as it is being presented, shows a stunning and worisome lack of mathematical literacy. A few simple math calculations show that the promised 500 Euros in VAT rebate are far below the range of an average family, even astronomically out of reach for more than 99% of the population. Returning 15% of VAT, even by assuming that all expenses are made in goods and services taxed at the maximum 18% rate, means that we will get back only 2.7% of what we spend. To earn a rebate of 500 Euros per year the “average” family would thus have to spend around 18,500 Euros per year, or more than 1.500 Euros per month. It is worth repeating here that this calculation is made as if the whole consumption consists of products taxed at 18%, which excludes things such as credit payments, rent, insurance and a whole array of products taxed at lower rates. In reality consumption would have to be much higher than 1.500 Euros per month.
Correct calculations of the rebate for an average family show an entirely different picture. A starting point for such calculations can be the latest available official average salary, which was 23.196 denars net. If we then suppose that all of it is spent, and only in goods and services taxed at 18%, then such an average consumer will receive only about 120 Euros back. Since part of the income will surely be spent on products with waived VAT or taxed at a lower rate, in reality that average consumer will get a far smaller rebate.
The math is even more ruthless for a poor family that lives on a single minimum income. By the same assumptions, that family will hypothetically get only about 60 Euros per year back, but in reality it will be even less than that. We can only imagine what surprise the government has in store for such a family, which expects 500 Euros per year and instead gets only 60 or less. This makes the VAT rebate more than just bad math; it is horribly bad PR for the government.
Equally dubious is the expectation that this measure will raise VAT income by an additional 300 million Euros per year, as the Prime Minister himself has claimed. It seems that this number has been picked to correspond with untaxed consumption of about 1.5 to 2 billion Euros, or a grey economy of about 15%-20% of GDP. It is however conveniently forgotten that VAT is a tax on added value, i.e. on the margin, and that not all products are taxed at the maximum rate. This means that the additional income from VAT will be far less than the claimed 300 million Euros, or alternatively that the grey part of economy is far bigger than 15%-20% of GDP. In the second case we have a much bigger problem, that cannot be solved through populistic measures such as the VAT rebate.
In conjunction with the funny mathematical construction, equally questionable is the way this measure will be implemented, an important issue on which the goverment hasn’t yet said a word. There are two options here: the “old-school” mechanical administration of the process or the “modern” electronic version. In the first case the rebate can be implemented in such a way that each consumer periodically (quarterly, yearly) goes with a bag full of fiscal accounts and bills to the local IRS office and asks for the rebate. We can only imagine what burden this will be for the state administration and what kind of chaos it will cause at IRS counters. There is also the issue of if and how this process can be monitored and controlled, and the immense potential for manipulations and corruption that it carries.
Carrying out such a process in a mechanical way may seem ridiculous and overcome for the 21st century, but there seems to be no better alternative at the moment. The only other way would be to keep separate tabs for VAT payments for each consumer, a system that should be run in real-time. In other words it is possible only by using individual electronic cards at each sales point, at any given time. We are thus talking about a million consumer cards and hundreds of thousands of card readers at sales points throughout the country. Judging by the chaos we are witnessing with the much simpler electronic health cards, it is clear that the country is not ready for a venture such as electronic tab-keeping, calculation and return of VAT. However ridiculous it may seem, the first, old-fashioned, way is the only option we have at the moment.
Overall the proposal for VAT rebate looks like a simple election campaign manipulation, that for some strange reason is being repeated after elections, or it may be just an ill-conceived populistic measure. That would mean that the proposer is simply lying or has no idea what it’s doing. In either case it is a dissapointing stand by a reform-oriented government.