Focus on the crisis 2011 edition

While the drop in the ITRs for labour and capital are consistent with the nature of the taxes,
the drop of the ITR on consumption is surprisingly sharp given the proportional nature of
indirect taxes, mirroring the weakness in VAT revenues recorded in the recession. The drop
is even more surprising considering that several countries increased consumption tax rates
in 2009, which should provide a boost to the ITR on consumption. This phenomenon can
nevertheless be explained by a combination of factors. First, the depth of the recession is
likely to have shifted consumption patterns towards primary goods, which are normally
subject to lower VAT rates. Second, because of data issues, the ITR on consumption is
affected by the decline in construction activity, which was particularly marked in this
recession. In addition, inventories involuntarily accumulated by businesses during the
recession reduce the amount of VAT paid, as do rising bankruptcies (3). The time lags with
which tax revenues are recorded may also be affecting the result: time lags on indirect taxes
tend to be shorter than for direct taxes, which may lead, statistically, to a faster drop for
indirect taxes. (4) Last but not least, many countries have introduced measures aimed at
granting companies the possibility to defer tax payments, including VAT.

12 Taxation trends in the European Union