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Modelling Value-Added Tax in the Presence of Multiproduction and Differentiated Exemptions

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Author Info
James Giesecke
Nhi Hoang Tran

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Abstract

We develop a framework for economy-wide modelling of value-added tax systems. Our framework models a number of complexities of VAT systems as they are implemented by tax agencies. In particular, we model multiple rates, multiple exemptions, multiple degrees of refundability across commodity users, and multi-product enterprises. A detailed VAT framework, such as that which we present in this paper, is important for correct modelling of VAT within a general equilibrium model. Such a framework is also of value in correctly calculating the distribution of indirect tax payments in CGE model databases, a prerequisite of accurate welfare impact calculations. We use the model to analyse the effects of simplifying Vietnam's complex VAT system. We simplify the system by moving from three tax rates to one budget-neutral rate, while also removing many discretionary exemptions. We find that the policy lifts real private consumption spending, our welfare measure, by an average of 0.9 per cent over our simulation period, 2008-2018. .

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Paper provided by Monash University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number g-182.

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Date of creation: Feb 2009
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Handle: RePEc:cop:wpaper:g-182

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Related research
Keywords: value added tax; dynamic CGE model; Vietnam; indirect tax reform;

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Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Kehoe, Timothy J. & Noyola, Pedro Javier & Manresa, Antonio & Polo, Clemente & Sancho, Ferran, 1988. "A general equilibrium analysis of the 1986 tax reform in Spain," European Economic Review, Elsevier, vol. 32(2-3), pages 334-342, March. [Downloadable!] (restricted)
  2. Gottfried, Peter & Wiegard, Wolfgang, 1991. "Exemption versus zero rating : A hidden problem of VAT," Journal of Public Economics, Elsevier, vol. 46(3), pages 307-328, December. [Downloadable!] (restricted)
  3. Sijbren Cnossen, 1998. "Global Trends and Issues in Value Added Taxation," International Tax and Public Finance, Springer, vol. 5(3), pages 399-428, July. [Downloadable!] (restricted)
  4. Don Fullerton & Yolanda K. Henderson & John B. Shoven, 1984. "A Comparison of Methodologies in Empirical General Equilibrium Models ofTaxation," NBER Working Papers 0911, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Charles L. Ballard & John Karl Scholz & John B. Shoven, 1987. "The Value-Added Tax: A General Equilibrium Look at Its Efficiency and Incidence," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 445-480 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. Harrison, W Jill & Pearson, K R, 1996. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Computational Economics, Springer, vol. 9(2), pages 83-127, May.
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  7. Stephen Marks, 2005. "Proposed changes to the value added tax: implications for tax revenue and price distortions," Bulletin of Indonesian Economic Studies, Taylor and Francis Journals, vol. 41(1), pages 81-95, April. [Downloadable!] (restricted)
  8. Peter B. Dixon & Maureen T. Rimmer, 1999. "Changes in Indirect Taxes in Australia: A Dynamic General Equilibrium Analysis," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 32(4), pages 327-348. [Downloadable!] (restricted)
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