Less evasion means more production? The effect of the consumption tax on the economic performance of the restaurant and bars subsector in Colombia

Abstract

For fiscal policy makers, it is essential to have empirical evidence to support and inform ex ante the decisions to be made and the policies to be proposed in tax matters. That is why there are numerous empirical studies that have shown various effects of fiscal shocks on macroeconomic variables such as employment, wages, investment, and income. This article develops a conclusive analysis of the multivariate effect that a Colombian tax regulation had on the economic subsector of restaurants, catering and bars, starting with the change in the value added tax VAT (16%), which allows the deduction of the tax paid for intermediate consumption, for the consumption tax (8%) which, although has a lower rate, does not allow this deduction. The potential tax paid with both taxes was estimated, seeking to know if the regulation meant a reduction in the burden and, subsequently, making use of a discontinuous regression model that compares this subsector in question with other similar subsectors present in DANE’s annual services survey, a positive effect of this regulation on the variables of interest was found. For example, this tax change meant an increase of 23% in the average nominal production of the companies in the sector when compared with other sectors that were not covered by this reform.