A Poorly Targeted Subsidy? The Fiscal and Social Costs of EU VAT Expenditures

A Poorly Targeted Subsidy? The Fiscal and Social Costs of EU VAT Expenditures | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article A Poorly Targeted Subsidy? The Fiscal and Social Costs of EU VAT Expenditures Michael Christl This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9358437/v1 This work is licensed under a CC BY 4.0 License Status: Under Review Version 1 posted 6 You are reading this latest preprint version Abstract Value-added tax (VAT) systems in EU Member States deviate substantially from a uniform-rate benchmark through reduced rates and exemptions, typically motivated by distributional concerns. This paper provides microsimulation evidence on the fiscal and distributional effects of VAT expenditures in five major EU economies (Germany, France, Italy, Spain and Poland) using EUROMOD and its Indirect Tax Tool, drawing on EU-SILC 2022 microdata matched with EU-HBS 2015 expenditure data. Simulating a universal standard-rate VAT counterfactual, we find that abolishing all VAT expenditures would reduce post-consumption-tax disposable income by 8-15% for bottom-decile households versus 4-5% for the top decile, with Italy and Spain displaying the most regressive reform-cost profiles. The regressivity gap ranges from -6.3 percentage points in Poland to -16.3 in Italy. While VAT expenditures offer meaningful purchasing-power protection to lower-income households in proportional terms, this protection is poorly targeted in absolute terms and could be replicated more efficiently through targeted income transfers. We discuss implications for revenue-neutral VAT reform and the efficiency-equity trade-off in EU indirect taxation. JEL codes: H23, H25, D31, C15. value-added tax VAT expenditures reduced rates exemptions income inequality microsimulation EUROMOD indirect taxation European Union Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Under Review Version 1 posted Reviewers agreed at journal 18 May, 2026 Reviewers agreed at journal 21 Apr, 2026 Reviewers invited by journal 21 Apr, 2026 Editor assigned by journal 13 Apr, 2026 Submission checks completed at journal 09 Apr, 2026 First submitted to journal 08 Apr, 2026 You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. 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