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Competition and Welfare Effects of VAT Exemptions

Author

Listed:
  • Dietl Helmut M

    () (University of Zurich)

  • Jaag Christian

    () (University of St. Gallen and Swiss Economics)

  • Lang Markus

    () (University of Zurich)

  • Trinkner Urs W.O.

    () (University of Zurich and Swiss Economics)

Abstract

Distortions under the value-added tax (VAT) arise partly 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. We analyze the effects of such asymmetric tax regimes on market shares, optimal prices, tax receipts, and social welfare. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of such tax exemptions depends on the fraction of VAT-rated inputs versus the fraction of non-rated customers. We further elucidate main competitive impacts of VAT policies, while showing their consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. Our paper provides guidance on how to resolve the policy trade-off between a level playing field in the market, consumer surplus, and government tax revenue.

Suggested Citation

  • Dietl Helmut M & Jaag Christian & Lang Markus & Trinkner Urs W.O., 2011. "Competition and Welfare Effects of VAT Exemptions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-29, April.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:19
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    References listed on IDEAS

    as
    1. Christian Jaag, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(III), pages 261-282, September.
    2. Helmut Dietl & Christian Jaag & Markus Lang & Martin Lutzenberger & Urs Trinkner, 2011. "Impact of VAT Exemptions in the Postal Sector on Competition and Welfare," Chapters,in: Reinventing the Postal Sector in an Electronic Age, chapter 19 Edward Elgar Publishing.
    3. Giesecke, James A. & Nhi, Tran Hoang, 2010. "Modelling value-added tax in the presence of multi-production and differentiated exemptions," Journal of Asian Economics, Elsevier, vol. 21(2), pages 156-173, April.
    4. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 365-381, August.
    5. De Donder Philippe & Cremer Helmuth & Dudley Paul & Rodriguez Frank, 2009. "On the Value Added Taxation Status of National Postal Operators," Review of Network Economics, De Gruyter, vol. 8(3), pages 1-22, September.
    6. Sijbren Cnossen, 1998. "Global Trends and Issues in Value Added Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(3), pages 399-428, July.
    7. Helmut M. Dietl & Urs Trinkner & Reto Bleisch, 2004. "Liberalization and Regulation of the Swiss Letter Market," Working Papers 0001, Swiss Economics, revised Jul 2005.
    8. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 905-928, December.
    9. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
    10. Christian Jaag & Urs Trinkner, 2010. "The interaction of universal service costing and financing in the postal sector: A calibrated approach," Working Papers 0019, Swiss Economics.
    11. Cnossen, Sijbren, 2003. "How Much Tax Coordination in the European Union?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 625-649, November.
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    Cited by:

    1. Christian Jaag & Urs Trinkner & Jeffrey Yusof, 2014. "Assessment of EU Postal Sector Policy during the Second Barroso Administration (2010-2014)," Working Papers 0050, Swiss Economics.

    More about this item

    JEL classification:

    • 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

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