Vat Collection Only at the Retail Stage

The paper presented in this ZEW Research Seminar explores the effects of institutional changes in tax collection on VAT remittances at the retail stage, using data on individual firms’ tax files from the universe of German VAT returns. More specifically, the author explores if tax evasion increases at the “last mile” due to the implementation of the so-called “reverse charge (RC)” mechanism in Germany. With the implementation of RC, Germany is increasingly removing VAT withholding along the value chain. To identify the effects of RC, she employs an instrumental variable (IV) approach. The IV approach exploits the institutional variation of RC based on the staggered introduction of RC in certain industries. The findings do not indicate that RC leads to greater evasion at the retail stage.