Tax Fraud and value-added tax in Spain: Incidence in a general equilibrium model

The aim of the article is to quantify and analyze the potential effects of a decrease in tax fraud in Spain. We use an applied general equilibrium model with a set of scenarios showing an improvement in tax compliance rates and its effects on productive sectors and households. Enhancing the tax compliance moves the effective Value-Added Tax (VAT) rates closer to the nominal rates. A revenue neutral assumption is applied in some scenarios where social contributions rates are lowered. There is also other scenario where the VAT rates increase is complemented with a lump-sum transfer and other scenario with a non-revenue-neutral rule. The results show that the drop in tax evasion would affect positively the main macroeconomic variables. For example, with the revenue neutral rule and a fall in evasion in the most fraudulent productive sectors, an increase in 1.4 percentage points in effective VAT rates would raise GDP by 1.33%, employment by 1.57%, real wages and rents by 0.76% and 0.06%, respectively, VAT revenue around 20%, and national welfare by 0.48%. Other results show the convenience of a differentiated sectoral tax audit, with a special focus on some sectors.