Competition and Welfare Effects of VAT Exemptions
AbstractDistortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
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Bibliographic InfoPaper provided by Swiss Economics in its series Working Papers with number 0024.
Date of creation: Sep 2010
Date of revision: Oct 2010
Publication status: Published in B.E. Journal of Economic Analysis & Policy, 11(1):19
Value-added tax; indirect taxation; tax regulation; tax exemption; universal service obligation; postal sector;
Other versions of this item:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L87 - Industrial Organization - - Industry Studies: Services - - - Postal and Delivery Services
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-10-02 (Accounting & Auditing)
- NEP-ALL-2010-10-02 (All new papers)
- NEP-PBE-2010-10-02 (Public Economics)
- NEP-PUB-2010-10-02 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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