IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_5371.html
   My bibliography  Save this paper

VAT Notches

Author

Listed:
  • Li Liu
  • Benjamin Lockwood

Abstract

We develop a conceptual framework which captures the e¤ect of the VAT system on profit by two effective taxes. This allows (i) predictions of the determinants of voluntary registration and bunching at the registration threshold; (ii) develops a formula for estimating the elasticity of value-added with respect to the statutory tax. We show that the marginal excess burden of the tax on suppliers is measured by this elasticity, extending Feldstein.s analysis of the elasticity of taxable income to an indirect tax setting. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, voluntary registration is positively related to the intensity of input use and negatively related to the share of B2C transactions. There is bunching at the VAT threshold, and the amount of bunching is negatively related to the intensity of input use and positively related to the share of B2C transactions, again consistently with the theory. We provide an estimate of the elasticity of the VAT tax base in the range of 0.09 and 0.18.

Suggested Citation

  • Li Liu & Benjamin Lockwood, 2015. "VAT Notches," CESifo Working Paper Series 5371, CESifo.
    • Handle: RePEc:ces:ceswps:_5371
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5371.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Raj Chetty, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 31-52, August.
    2. Miguel Almunia & David Lopez-Rodriguez, 2014. "Heterogeneous Responses to Effective Tax Enforcement: Evidence from Spanish Firms," Working Papers 1412, Oxford University Centre for Business Taxation.
    3. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    4. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    5. Wojciech Kopczuk & David Munroe, 2015. "Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 214-257, May.
    6. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    7. Michael Carlos Best & Henrik Jacobsen Kleven, 2018. "Housing Market Responses to Transaction Taxes: Evidence From Notches and Stimulus in the U.K," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 157-193.
    8. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    9. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    10. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    11. Kosonen, Tuomas & Harju, Jarkko, 2013. "Restaurant VAT cut: Cheaper meal and more service?," Working Papers 52, VATT Institute for Economic Research.
    12. Michael P. Devereux & Li Liu & Simon Loretz, 2014. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 19-53, May.
    13. Richard Blundell, 2009. "Assessing the Temporary VAT Cut Policy in the UK," Fiscal Studies, John Wiley & Sons, vol. 30(1), pages 31-38, March.
    14. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
    15. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    16. Vesal, Mohammad, 2014. "Optimization Frictions in the Choice of UK Flat Rate Scheme of VAT," MPRA Paper 101017, University Library of Munich, Germany.
    17. Kosonen, Tuomas, 2013. "More haircut after VAT cut? On the efficiency of service sector consumption taxes," Working Papers 49, VATT Institute for Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rauhanen, Timo & Harju, Jarkko & Matikka, Tuomas, 2016. "The effects of size-based regulation on small firms: evidence from VAT threshold," Working Papers 75, VATT Institute for Economic Research.
    2. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Leibniz Centre for European Economic Research.
    3. Bognetti, Giuseppe & Santoni, Michele, 2016. "Increasing the substitution elasticity can improve VAT compliance and social welfare," Economic Modelling, Elsevier, vol. 58(C), pages 293-307.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Miguel Almunia & David Lopez-Rodriguez, 2018. "Under the Radar: The Effects of Monitoring Firms on Tax Compliance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 1-38, February.
    2. Li Liu & Ben Lockwood & Miguel Almunia & Eddy H. F. Tam, 2021. "VAT Notches, Voluntary Registration, and Bunching: Theory and U.K. Evidence," The Review of Economics and Statistics, MIT Press, vol. 103(1), pages 151-164, March.
    3. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Leibniz Centre for European Economic Research.
    4. Jarkko Harju & Tuomas Matikka & Timo Rauhanen, 2016. "The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold," CESifo Working Paper Series 6115, CESifo.
    5. Joan Vilá, 2019. "Respuestas en los ingresos frente a un programa de transferencias monetarias: evidencia de un notch a partir de registros administrativos de Uruguay," Documentos de Trabajo (working papers) 19-07, Instituto de Economía - IECON.
    6. Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
    7. Asatryan, Zareh & Joulfaian, David, 2022. "Taxes and Business Philanthropy in Armenia," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 914-930.
    8. Miguel Almunia & David Lopez-Rodriguez, 2014. "Heterogeneous Responses to Effective Tax Enforcement: Evidence from Spanish Firms," Working Papers 1412, Oxford University Centre for Business Taxation.
    9. Marx, Benjamin M., 2018. "Dynamic Bunching Estimation with Panel Data," MPRA Paper 88647, University Library of Munich, Germany.
    10. Kleven, Henrik & Best, Michael & Spinnewijn, Johannes & Waseem, Mazhar & Brockmeyer, Anne, 2013. "Production vs Revenue Efficiency With Limited Tax Capacity: Theory and Evidence From Pakistan," CEPR Discussion Papers 9717, C.E.P.R. Discussion Papers.
    11. Bertanha, Marinho & McCallum, Andrew H. & Seegert, Nathan, 2023. "Better bunching, nicer notching," Journal of Econometrics, Elsevier, vol. 237(2).
    12. Camilo Gómez, 2019. "How Responsive are Firms to the Corporate Wealth Tax?," Documentos CEDE 17433, Universidad de los Andes, Facultad de Economía, CEDE.
    13. Hargaden, Enda Patrick, 2020. "Taxpayer responses in good times and bad," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 653-690.
    14. Ben Lockwood, 2020. "Malas notches," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 779-804, August.
    15. He, Daixin & Peng, Langchuan & Wang, Xiaxin, 2021. "Understanding the elasticity of taxable income: A tale of two approaches," Journal of Public Economics, Elsevier, vol. 197(C).
    16. Homonoff, Tatiana & Spreen, Thomas Luke & St. Clair, Travis, 2020. "Balance sheet insolvency and contribution revenue in public charities," Journal of Public Economics, Elsevier, vol. 186(C).
    17. Kosonen, Tuomas & Matikka, Tuomas, 2020. "Discrete Labor Supply: Empirical Evidence and Implications," Working Papers 132, VATT Institute for Economic Research.
    18. Schächtele, Simeon, 2016. "The Importance of Deductions in Response to the Personal Income Tax: Bunching Evidence from Germany," VfS Annual Conference 2016 (Augsburg): Demographic Change 145748, Verein für Socialpolitik / German Economic Association.
    19. Fack, Gabrielle & Landais, Camille, 2016. "The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France," Journal of Public Economics, Elsevier, vol. 133(C), pages 23-40.
    20. Simeon Schächtele, 2020. "Tax Responses at Low Taxable Incomes: Evidence from Germany," Fiscal Studies, John Wiley & Sons, vol. 41(2), pages 411-439, June.

    More about this item

    Keywords

    VAT; tax threshold; bunching; voluntary registration; elasticity;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_5371. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.