Transformations  in
Business & Economics

MEASURING THE EFFECTS OF VAT CHANGES ON THE TOURISM INDUSTRY: THE CASE OF CROATIA
Marinko Skare, Zeljko Kukurin

ABSTRACT. Changes in value-added tax (VAT) have a significant impact on the tourism industry's competitiveness level. In the European Union, a reduced VAT rate for tourist accommodation and catering services is recognized as an instrument for boosting competitiveness, since the vast majority of EU countries apply reduced VAT rates for both accommodation and catering services. In this study, we use State-space modelling to simulate and estimate the macroeconomic effects of VAT change (an increase from 13% to 25%) in Croatia. Simulations from the State-space model show that an increase in VAT has significant adverse effects on competitiveness and growth potentials on the whole tourism industry. An increase in VAT from 13% to 25% (simulation with no multiplying effects) results in -6% fall in total revenue, -2.64% decline in employment, 5.281 decline in employment, -5.04% fall in total investments. Simulations (including multiplying effects) are closer to the real scenario of a significant increase in VAT on the tourism industry - 8.76% fall in total revenue, -3.84% decline in employment, -7.31% fall in total investments.

KEYWORDS:  VAT, tourism, Croatia, State-space, competitiveness, fiscal policy.

JEL classification:  C32, L83, Z32.