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Implementation of Value-Added Tax on Iran Banking Services: An Application of DSGE Model

Author

Listed:
  • Gholami, Ahmad

    (Department of Economics, University of Tehran)

  • Abasinejad, Hossein

    (Department of Economics, University of Tehran)

Abstract

In the Value Added Tax (VAT) system some goods and services, such as banking services, are exempted from taxes. Based on theoretical foundations, exempt treatment leads to several distortions and inefficiencies in the economy. In order to understand the importance of exemption on macroeconomic fluctuations as well as the fundamental role of financial intermediaries in economy shocks, this study using a Dynamic Stochastic General Equilibrium (DSGE) model provides an empirical analysis for policy simulations with consideration of VAT on financial services under different scenarios. Accordingly, the values of model parameters was estimated via calibration method and also the model accuracy were evaluated by Brooks & Gelman test and impulse-response functions. Simulation results of the policy exercise suggest that shifting from exemption to full taxation, reduces the cost of bank, and increases the bank free resources leading to higher investment and output through more bank loans.

Suggested Citation

  • Gholami, Ahmad & Abasinejad, Hossein, 2016. "Implementation of Value-Added Tax on Iran Banking Services: An Application of DSGE Model," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(3), pages 283-303, July.
    • Handle: RePEc:mbr:jmonec:v:11:y:2016:i:3:p:283-303
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    References listed on IDEAS

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    More about this item

    Keywords

    VAT; Banking Services; Exempt Treatment; Dynamic Stochastic General Equilibrium;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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