VAT expenditures, VAT design, VAT collection efficiency, Germany, Poland

VAT collection is affected by many different factors. One of the most important of them is tax design. Special provisions of tax law such as tax exemptions, tax rate or tax base reductions may significantly decrease tax revenue. From the budgetary point of view they may therefore be perceived as a form of expenditure. The topic of tax expenditures gained in importance due to the current scarcity of public resources and urgent need for fiscal consolidation in many European Union Member States. Moreover the amount of tax expenditures and revenue loss attributable to them in these countries have been growing rapidly over the past two decades. The basic aim of this article is to evaluate the effect of tax expenditures on VAT revenue in Germany and Poland. The first part reviews the definition and measurement methods of tax expenditures in both countries. The second part of the article compares VAT rates, VAT exemptions and VAT collection efficiency in Germany and Poland. The third uses the data included in the reports on federal subsidies in Germany and reports on tax preferences in Poland to analyse the value and structure of the most important VAT expenditures.