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In recent decades, several countries around the world have implemented cash restriction policies to incentivize the use of electronic means of payments with the aim to combat money laundering, terrorism financing, and tax evasion. This paper examines the impact of the proliferation in credit and debit card usage on consumption tax compliance using annual national level data for 26 European Union (EU) member states from 2000 to 2016. We measure consumption tax compliance using estimated Value-Added Tax (VAT) gaps, defined as the difference between the theoretical VAT liability according to the law and actual VAT collections. We exploit variation in time and space of credit and debit card usage across 26 EU member states from 2000-16 using panel data and instrumental variable techniques and find that plastic money use significantly reduces tax evasion while cash withdrawals appear to noticeably widen the compliance gap. This paper contributes to the literature on the effect of modern means of payment on tax compliance by using a more adequate measure of the VAT compliance gap compared to earlier works and by accounting for potential confounders such as tax policy choices and ex ante enforcement capacity of tax administrations to curb the gap.


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