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Contracting out: Dutch municipalities reject the solution for the VAT-distortion


Author Info

  • Wassenaar, M.C.

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Dijkgraaf, E.
  • Gradus, R.H.J.M.


In 2003, the Dutch government introduced a VAT-compensation fund in order to create a level-playing field for local governments with respect to Value Added Tax (VAT). By introducing this fund the tax difference between governments that supply services themselves and governments that contract out to the private sector was eliminated. This paper shows, however, that according to most of the municipalities differences in VAT treatment did not hinder the contracting out of public services. Therefore, the fund lacks a great deal of its legitimacy. More important, the fund is not effective, as the number of contracted public services has hardly increased since the introduction. In general, municipalities have a negative opinion about this fund. They state that more than the budgetary effects, other arguments are relevant in the decision-making on the outsourcing of activities such as the quality of services and the employment in the own municipality. As the budgetary position for a number of municipalities will decline in the near future, the fund still may stimulate the outsourcing of public services in future.

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Bibliographic Info

Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0003.

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Date of creation: 2007
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Handle: RePEc:dgr:vuarem:2007-3

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Keywords: VAT; Contracting out; Municipalities; Compensation fund;

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Cited by:
  1. Copenhagen Economics, 2013. "VAT in the Public Sector and Exemptions in the Public Interest," Taxation Studies 0045, Directorate General Taxation and Customs Union, European Commission.


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