The Distributive Effects of Recent VAT Changes in the Republic of Ireland
Across the European Union (EU) changes to indirect taxes, and particularly Value Added Taxes (VAT), have been a central part of countries response to the economic crisis. By mid-2014, 22 of the 28 EU member states had increased VAT rates since the onset of the economic crisis in 2008.
Over that period VAT rates have featured as an area of change in a number of Republic of Ireland budgets. This paper focuses on the two most recent changes to these rates, introduced as part of the international bailout programme agreed by the Irish Government and the Troika (European Union, European Central Bank and the International Monetary Fund). These saw:
(i) The temporary introduction, and subsequent retention, of a second reduced rate of VAT for specific items related to the tourism sector (where the rate decreased from 13.5% to 9%); and
(ii) An increase in the standard rate of VAT from 21% to 23%.
This paper builds on previous work by Collins and Turnbull (2013) and Collins (2014a) to examine the distributive impacts of these two changes. To date, a detailed ex post empirical examination of these changes has been missing from assessments of recent crisis-induced policy reforms; a void this paper attempts to address. Using projections for the 2014 tax year, VAT is expected to generate more than one-fifth of exchequer revenue and is the second most important source of overall state income. The reforms examined by this paper cost, in revenue received or forgone, more than €1 billion per annum.
A summary of this paper was publishes as an NERI Research inBrief - available here.