Analysis of the indirect support to cultural activities, specifically the lower VAT rate for books in EU

1. Fiscal
and
Economic
Aspects
of
Europe’s
Cultural
Heritage
in
the
Digital
Age
Karol
J.
Borowiecki
Trilce
Navarrete
ICCA
Paris
6-­‐7
October
2014

2. The
RICHES
ConsorFum

3. The
changing
world
view

4. • Our
Fmes
(we
live
in
the
Digital
Age!)
are
extremely
interesFng
and
very
dynamic.
– Making
now
the
right
choices
can/will
have
effects
on
future
generaFons.
• Enlarging
cultural
audiences
is
of
great
importance
to
policy
makers,
NPOs
and
individuals.
• So
far,
not
much
has
been
looked
at
fiscal
policy
and
how
it
can
be
harnessed
to
achieve
the
goals
of
cultural
policy.
• Also:
Reduced
rate
for
E-­‐books
is
unique
in
France!
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MoFvaFon

5. CotribuFon
(so
far)
• Document
fiscal
rates
on
cultural
goods
and
services
in
EU
over
Fme.
• Shed
some
light
on
the
correlates
of
tax
rates.
• A^empt
to
study
the
effects
of
fiscal
incencFves.
– The
impact
of
reduced
rates
on:
• prices
of
cultural
goods
and
services.
• cultural
expenditure
of
households.
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6. Governments
support
producFon
and
consumpFon
of
the
arts
and
culture
through
direct
financing,
such
as
grants
and
subsidies
given
to
heritage
organizaFons
or
as
vouchers
given
to
consumers.
Another
form
of
support
takes
place
through
indirect
tax
rules
which
have
two
main
modaliFes:
(1) Tax
deducFons
to
gi`s
(also
in-­‐kind)
(2) Reduced
VAT
rate
(only
in
EU)
Indirect
support
works
as
incenFve,
therefore
it
is
dependent
on
the
behaviour
of
donors,
corporaFons
and
consumers.
Reduced
VAT
rates
cannot
be
specifically
directed
towards
a
desired
good,
provider,
or
consumer,
unlike
direct
subsidies.
Reduced
VAT
rates
to
sFmulate
cultural
acFviFes
has
received
less
academic
a^enFon,
compared
to
the
mulFple
forms
of
tax
deducFons.
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Background

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Background
Direct government support
Indirect government support

8. /RICHES
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Background
Direct government support
Indirect government support
Policy
FoundaFons

9. Tax
law
serves
to
raise
revenue
for
public
purposes.
It
also
supports
the
non-­‐
profit
sector,
serves
as
equity
builder
through
fair
redistribuFon,
can
be
used
as
policy
instrument
for
the
public
interest,
and
is
a
tool
to
differenFate
the
profit
and
non-­‐profit
sectors
(Schuster,
2006).
Tax
concessions
are
obscure,
therefore
not
broadly
recognized
as
a
cost
to
the
state.
There
is
limited
documentaFon
on
tax
expenditure
on
the
arts
and
culture
because
it
is
difficult
to
esFmate
costs
beforehand,
it
requires
a
high
level
of
detailed
reporFng,
and
it
is
hardly
recognized
as
a
state
expenditure
by
the
public
(O’Hagan,
2003).
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Background

10. The
European
Commission
has
established
a
set
of
guidelines
to
harmonize
the
VAT
across
Member
States.
A
reduced
VAT
rate
has
been
established
for
a
number
of
goods
and
services:
(1) The
transacFon
of
books,
periodicals
and
magazines
not
used
for
adverFsing;
(2) The
admission
to
shows,
theater,
concerts,
museums,
cinema
and
zoos;
(3) Services
supplied
by
or
royalFes
due
to
writers,
composers
and
performing
arFsts;
and
(4) Supply
of
goods
and
services
by
chariFes.
(see
EC
Council
DirecFve
on
VAT
2006)
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VAT
in
EU

11. The
increased
use
of
digital
technology
for
the
producFon,
distribuFon
and
consumpFon
of
cultural
goods
has
raised
quesFons
on
the
definiBons
used
by
the
VAT
DirecFve.
France
and
Luxemburg
disagree
with
the
EC
definiFons
and
have
argued
for
a
revision.
In
2013,
a
Public
ConsultaFon
was
conducted
to
review
the
VAT
legislaFon.
Results
are
promising:
• It
is
expected
that
books
will
no
longer
be
defined
by
a
carrier
but
by
its
informaFon
content.
In
this
way,
e-­‐books
can
enjoy
the
same
reduced
VAT
rate
as
paper
books
and
audio
books.
• The
same
argument
applies
for
periodicals
and
other
informaFon
goods.
The
performing
arts
have
seen
new
distribuFon
channels,
through
digital
broadcast
technology,
i.e.,
Pathe
Opera
(Bakhshi
and
Throsby,
2011).
For
performing
arts,
a
tax
concession
would
amount
to
15-­‐20%
of
box
office
income,
including
for
profit
companies
(O’Hagan,
2003).
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VAT
in
digital
EU

12. The
theory
-­‐
Effects
of
a
sales
tax
Standard rate
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Price
S
D
Quantity
SStandard rate
P*
Q* QStandard rate
PStandard rate

13. The
theory
-­‐
Effects
of
a
sales
tax
SReduced rate
Q*
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Price
S
D
Quantity
SStandard rate
PReduced rate
P*
QReduced rate
Reduced rate Tax = P , Q
PStandard rate
Standard rate
QStandard rate
Tax = DW Loss

14. • Fiscal
data
comes
from
EC
publicaFons
on
VAT
Rates
Applied
in
the
Member
States
of
the
European
Union
1993-­‐2014.
• Data
on
household
expenditure
on
cultural
goods
and
services
are
taken
from
the
Household
Budget
Survey
(wave
2005).
– HBS
data
are
collected
according
to
the
COICOP
classificaFon
adapted
to
HBS
needs
(COICOP-­‐HBS).
• Price
data
comes
from
the
Council
of
Europe/ERICarts
Compendium
of
Cultural
Policies
and
Trends
2003-­‐2013.
– It
covers
cultural
industries
consumer
price
(e.g.,
price
of
books)
and
public
arts
services
prices
(e.g.,
price
of
art
museum
Fckets).
• Data
on
internet
use
comes
from
Eurostat,
Special
module
of
ICT
survey
2008:
Individuals
—
Use
of
advanced
services.
• Data
on
populaBon
size,
GDP
per
capita
and
educaBonal
aKainment
obtained
from
Eurostat
and
covers
1993-­‐2013.
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Data
sources

15. Outline
of
empirical
analysis
• Fiscal
rates
in
EU
over
Fme
and
the
correlates
• Fiscal
rates
and
prices
• Fiscal
rates
and
cultural
expenditure
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16. Standard
VAT
rates,
by
country
Austria Belgium Bulgaria Cyprus Czech Republic Denmark
Estonia Finland France Germany Greece Hungary
Ireland Italy Latvia Lithuania Luxembourg Malta
Netherlands Poland Portugal Romania Slovakia Slovenia
Spain Sweden United Kingdom
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15 20 25 30 15 20 25 30 15 20 25 30 15 20 25 30 15 20 25 30
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
Standard VAT rate
Year
Graphs by country

17. Reduced
rates
books,
by
country
Austria Belgium Bulgaria Cyprus Czech Republic Denmark
Estonia Finland France Germany Greece Hungary
Reduced rate books Year
Ireland Italy Latvia Lithuania Luxembourg Malta
Netherlands Poland Portugal Romania Slovakia Slovenia
Spain Sweden United Kingdom
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0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
Graphs by country

18. Standard
VAT
rate,
average
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18 19 20 21 22
Standard rate
1995 2000 2005 2010 2015
Year
EU EU of 1993 (constant sample)

19. Standard
VAT
rate,
average
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18 19 20 21 22
Standard rate
1995 2000 2005 2010 2015
Year
EU EU of 1993 (constant sample)
France

20. Reduced
rate
books
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2 4 6 8
Reduced rate books
1995 2000 2005 2010 2015
Year
EU countries EU countries of 1993 (balanced sample)
France

21. Reduced
rate
newspapers
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2 4 6 8
Reduced rate newspapers
1995 2000 2005 2010 2015
Year
EU EU of 1993 (constant sample)
France

22. Reduced
rate
periodicals,
admission
to
cultural
services,
TV
license,
supplies
by
creators
2 4 6 8
Reduced rate periodicals
1995 2000 2005 2010 2015
Year
EU EU of 1993
France
4 6 8 10
Reduced rate admission to cultural services
1995 2000 2005 2010 2015
Year
EU EU of 1993
France
0 5 10 15 20
Reduced rate TV license
1995 2000 2005 2010 2015
Year
EU EU of 1993
France
6 8 10 12 14
Reduced rate supplies by creators
2000 2005 2010 2015
Year
EU EU of 1993
France

23. Reduced
rate
E-­‐books
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5 10 15 20
Reduced rate E-books
2010 2011 2012 2013 2014
Year
EU France

24. Correlates
of
tax
rates
(EU,
1993-­‐2013)
(1) (2) (3) (4) (5) (6) (7)
Reduced rate Reduced rate Reduced rate Reduced rate Reduced rate Reduced rate
VAT standard
rate Books Newspapers Periodicals
Admission to
cultural services TV license
Supplies by
creators
log(population) -8.504*** -8.191 -29.32*** -30.52*** 5.189 15.37 0.831
(1.913) (5.324) (4.373) (7.193) (9.047) (9.851) (6.643)
GDP per capita -0.0576*** -0.0244 0.126*** 0.0691 0.0753 -0.0208 -0.0688
(0.0160) (0.0444) (0.0365) (0.0600) (0.0754) (0.0770) (0.0668)
Share of mid or
high educational
attainment (15-64
ages)
0.0469*** 0.149*** 0.0745** 0.174*** -0.383*** -0.0979 -0.165**
(0.0159) (0.0441) (0.0362) (0.0596) (0.0751) (0.0754) (0.0702)
Year FE yes yes yes yes yes yes yes
Country FE yes yes yes yes yes yes yes
Observations 409 409 409 409 406 366 313
R-squared 0.906 0.852 0.843 0.796 0.696 0.823 0.864
Number of years 21 21 21 21 21 21 14
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
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25. Outline
of
empirical
analysis
• Fiscal
rates
in
EU
over
Fme
and
the
correlates
• Fiscal
rates
and
prices
• Fiscal
rates
and
cultural
expenditure
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26. Reduced
rate
and
price
of
books
AT
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BE
BG
CY
CZ
DE
DK
EE
EL
ES
FI
HU FR
IE
IT
LV
LT
MT
NL
PL
PT
RO
SE
SI
SK
UK
0 5 10 15 20 25
Reduced rate books
10 20 30 40
Price of books

27. Reduced
rates
and
book
prices,
by
country
10 20 30 40 50 10 20 30 40 50 10 20 30 40 50 10 20 30 40 50
Austria Belgium Bulgaria Cyprus Czech Republic Denmark
Estonia Finland France Germany Greece Hungary
Ireland Italy Latvia Lithuania Luxembourg Malta
Netherlands Poland Portugal Romania Slovakia Slovenia
10 20 30 40 50
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
Spain Sweden United Kingdom
1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015
Year
Reduced rate books Price books
Graphs by country

28. Prices
and
reduced
tax
rates
(EU,
2003-­‐2013)
(1) (2) (3) (4)
Book price Museum price Opera price Cinema price
Reduced rate books 0.504*
(0.260)
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Reduced rate admission to
cultural services
0.0685* 0.570** -0.0187
(0.0380) (0.242) (0.0303)
log(population) 1.026 0.290 155.4*** 13.02**
(1.285) (1.442) (48.56) (4.134)
GDP per capita 0.643*** 0.597*** 2.875*** 0.341**
(0.160) (0.166) (0.611) (0.107)
Share of mid or high
educational attainment (15-64
ages) -0.455*** 0.164 -0.391 0.0561
(0.101) (0.202) (0.467) (0.0716)
Year FE yes yes yes yes
Country FE yes yes yes yes
Observations 169 172 178 180
R-squared 0.692 0.735 0.858 0.760
Number of year 10 10 10 10
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

29. Outline
of
empirical
analysis
• Fiscal
rates
in
EU
over
Fme
and
the
correlates
• Fiscal
rates
and
prices
• Fiscal
rates
and
cultural
expenditure
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30. Expenditure
on
books
AT
DK
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BE
CZ CY
EE
FI
FR
DE
HU EL
IE
IT
LT LV
LU
MT
NL
PL
PT
SK
SI
ES
SE
UK
0 5 10 15 20 25
Reduced rate books
0 50 100 150 200 250
Expenditure on books per household

31. Expenditure
and
trade
of
books
AT
DK
CZ CY BE
EE
FI
FR
DE
SE
HU EL
IE
LTLV IT
LU
MT NL
PL
PT
SK
SI
ES
UK
0 5 10 15 20 25
Reduced rate books
0 50 100 150 200 250
Expenditure on books per household
AT
CZ BECY
DK
LVLT EE
IT
FI
FR
DE
HU EL
IE
LU
MT NL
PL
PT
SK
SI
ES
SE
UK
0 5 10 15 20 25
Reduced rate books
5 10 15 20 25
Share of cultural expenditure on books
LV
RO AT
SK
BE
BG
CY
CZ
DK
LT
FI EE
SE
FR
DE
PT
HELU
IE
IT
LU
MT NL
PL
SI
ES
UK
0 5 10 15 20 25
Reduced rate books
0 10 20 30 40
Exports of books
AT
BE
LV
BG
CY
CZ
DK
ROSK
LT
EE FI
FR
DE
HEUL
IE
PT
IT
LU
MT NL
PL
SI
ES
SE
UK
0 5 10 15 20 25
Reduced rate books
0 20 40 60 80 100
Imports of books

32. Use
of
internet
to
purchase
books
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AT
BE
BG
CZ
CY
DK
EE
FI
FR
DE
EL HU
IE
IT
LV
LT
LU
MT
NL
PL
PT
RO
SK
SI
ES
SE
UK
0 5 10 15 20 25
Reduced rate books
0 10 20 30 40
Use of the Internet to purchase books

33. Expenditure
and
trade
of
newspapers
AT
BE
CZ CY
DK
EE
FI
FR
DE
EL
SK
HU
IE
IT
LT LV
LU
MT
NL
PL
PT
SI
ES
SE
UK
0 5 10 15 20
Reduced rate newspapers
0 100 200 300
Expenditure on newspapers per household
AT
EE
BE
DE
CCYZ
DK
FI
FR
EL
HU
IE
IT
LLTV
MT
LU
NL
PL
PT
SK
SI
ES
SE
UK
0 5 10 15 20
Reduced rate newspapers
5 10 15 20 25
Share of cultural expenditure on books
Reduced rate newspapers 0 5 10 15 20 25
AT
BE
BG
CY
CZ
DK
EE
FI
FR
DE
RO
SE
HEUL
IE
IT
LV
LT
LU
MT
NL
PL
PT
SK
SI
ES
UK
0 5 10 15 20
Exports of newspapers
AT
BE
LT
BG
CY
LV
CZ
FR
DK
EE
FI
DE
HEUL
IE
IT
LU
MT
NL
PL
PT
RO
SK
SI
ES
SE
UK
0 5 10 15 20
Reduced rate newspapers
0 20 40 60
Imports of newspapers

34. Reduced
rate
admission
to
cultural
services
BE AT
BG
CY
HU
CZ
DK
EE
FI
FR
DE
EL
IE
IT
LVLT
LU
MT
NL
PL
PT
SK
SI
ES
SE
UK
0 10 20 30
Reduced rate admission to cultural services
20 40 60 80
Have attended live perfomance arts
UK
CY AT BE
CZ
DK
EE
FI
FR
DE
HU
IE
IT
LV
LT
LU
MT
NL
PL
PT
SK
SI
ES
SE
0 10 20 30
Reduced rate admission to cultural services
0 50 100 150
Expenditure on cinema, theatres or concerts

35. Average
annual
expenditure
on
cultural
goods
and
services
per
household,
2005
(PPS)
Fiscal incentive for creators
AT
BE
CZ
DK
EE
FI
FR
DE
EL
HU
IE
IT
LT LV
LU
MT
NL
PL
PT
SK
SI
ES
SE
UK
5 10 15 20 25
Reduced rate creators 0 500 1000 1500 2000
Expenditure on cultural goods and services
BE
AT
Placebo
CY
CZ
DK
EE
FI
FR
DE
EL
HU
IE
IT
LT LV
LU
MT
NL
PL
PT
SK
SI
ES
SE
UK
15 20 25 30
Standard VAT rate
0 500 1000 1500 2000
Expenditure on cultural goods and services

36. Use
of
Internet
for
leisure
acFviFes
related
to
obtaining
and
sharing
audiovisual
content,
2008
(%
of
Internet
users)
AT
BE
BG
CY
CZ
RO
DK
EE
FI
FR
DE
EL
HU
IE
IT
LV
LT
LU
NL
MT
PL
PT
SK
SI
ES
SE
UK
0 5 10 15 20
Reduced rate newspapers 10 20 30 40
Use of Internet to post messages
AT
BG
CY
IT
CZ
DK
PL
EE
FI
PT
FR
IE ELDE HU
LT
MT LUNL
RO
ES
SK SI
SEUK
0 5 10 15 20 25
Reduced rate TV license
10 20 30 40 50
Use of Internet to watch movies

37. What
about
causality?
• CorrelaFon
does
not
imply
causality!
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– The
associaFon
could
be
reverse:
countries
with
high
cultural
consumpFon
decide
on
lower
tax
rates.
– Fiscal
rates
could
be
endogeneous
and
depend
on
some
other
variable
(e.g.,
wealth
of
a
country).
– Furthermore,
our
analysis
are
subject
to
omi^ed
variable
biases.
• Try
to
use
instrumental
variable
to
shed
light
on
causality.

38. Instrumental
variables
proposal
• Use
standard
VAT
rate
as
an
instrument
for
reduced
rates
for
books.
• Policy
makers
do
not
consider
book
consumpFon
when
deciding
on
VAT
rates.
• And
yet,
reduced
rates
for
books
are
supposedly
related
to
the
standard
VAT
rate.
– The
reduced
rates
are
likely
in
proporFon
to
the
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standard
rate.

39. The
causal
impact
of
reduced
rates
on
book
expenditure
(1) (2)
Reduced rate books
(First-stage OLS)
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Expenditure books
(IV)
Standard VAT rate 0.467***
(0.145)
Reduced rate books -2.778**
(1.303)
log(population) -4.218 -0.839
(5.398) (4.379)
GDP per capita 0.00246 3.442***
(0.0446) (0.549)
Share of mid or high
educational attainment
(15-64 ages)
0.127*** -0.644
(0.0441) (0.468)
Year FE yes yes
Country FE yes yes
Observations 409 25
R-squared 0.856 0.712
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

40. • We
study
whether
(and
how)
fiscal
policy
can
sFmulate
consumpFon
of
Europe’s
cultural
heritage
in
the
Age
of
DigitalisaFon.
So
far
by:
– DocumenFng
fiscal
rates
on
cultural
goods
and
services
in
EU
over
Fme.
– Sheding
some
light
on
the
correlates
of
tax
rates.
– A^empFng
to
study
the
effects
of
fiscal
incencFves.
• The
impact
of
fiscal
rates
on
prices
and
expenditure.
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Conclusions

41. • Study
the
impact
on
producBon
of
cultural
goods
and
services
(e.g.,
the
role
of
reduced
rates
for
creaters).
• Look
at
other
forms
of
subsidy,
as
those
affect
the
overall
picture
as
well
(e.g.,
significant
funding
of
the
film
industry
in
Denmark).
• Complement
this
aggregate
analysis
with
specific
case-­‐
studies
to
understand
the
mechanisms
behind
the
pa^erns
disclosed
here.
– With
a
parFcular
focus
on
the
changes
brought
by
digiBsaBon.
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Future
work

42. DigiFzed
visual
arts,
on
the
other
hand,
are
increasingly
being
made
available
free
of
charge,
at
insFtuFonal
websites
or
in
portals
such
as
Europeana,
exponenFally
increasing
consumpFon.
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VAT
in
digital
EU
InternaBonal
Transdisciplinary
Workshop
Cultural
Industries

43. InternaBonal
Transdisciplinary
Workshop
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Cultural
Industries
December2013

44. Thank
you!
Karol
J.
Borowiecki
(kjb@sam.sdu.dk)
Trilce
Navarrete
(trilce.navarrete@gmail.com)