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Revenue and welfare effects of financial sector VAT exemption

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  • Thiess Buettner
  • Katharina Erbe

Abstract

This paper provides an analysis of revenue and welfare effects associated with a VAT exemption of financial services, which is common among OECD countries. We follow a general equilibrium approach that considers effects of repealing the VAT exemption not only on consumer demand and intermediate-input demand for financial services, but takes account also of the VAT distortion of labor supply. We derive formal expressions for revenue and welfare effects, which can be quantified with a minimum of information about behavioral effects. Using VAT statistics as well as national accounts, we provide quantitative estimates of the effects of repealing the VAT exemption in Germany. Our baseline estimate indicates that tax revenues would increase by some €1.7 billion or 1.3 % of VAT revenues (excluding import turnover tax). Provided these revenue gains are used to finance a reduction in the VAT rate or in other distortive labor taxes our results indicate a modest welfare gain of about €1 billion, or 0.04 % of GDP. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Thiess Buettner & Katharina Erbe, 2014. "Revenue and welfare effects of financial sector VAT exemption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 1028-1050, December.
    • Handle: RePEc:kap:itaxpf:v:21:y:2014:i:6:p:1028-1050
    DOI: 10.1007/s10797-013-9297-5
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    References listed on IDEAS

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    1. Alan J. Auerbach & Roger H. Gordon, 2002. "Taxation of Financial Services under a VAT," American Economic Review, American Economic Association, vol. 92(2), pages 411-416, May.
    2. Rita de la Feria & Ben Lockwood, 2010. "Opting for Opting-In? An Evaluation of the European Commission's Proposals for Reforming VAT on Financial Services," Fiscal Studies, Institute for Fiscal Studies, vol. 31(2), pages 171-202, June.
    3. Genser, Bernd & Winker, Peter, 1997. "Measuring the fiscal revenue loss of VAT exemption in commercial banking," Discussion Papers, Series II 342, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    4. James R. Hines, 1999. "Three Sides of Harberger Triangles," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 167-188, Spring.
    5. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    6. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
    7. Harry Huizinga, 2002. "A European VAT on financial services? [‘Taxation of financial services under a VAT’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 497-534.
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    Citations

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    Cited by:

    1. Vidar Christiansen, 2017. "Indirect Taxation of Financial Services," CESifo Working Paper Series 6675, CESifo.
    2. Ben Lockwood & Erez Yerushalmi, 2019. "How should payment services be taxed?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(1), pages 21-47, June.
    3. Hendrik Hakenes & Eva Schliephake, 2021. "Responsible Investment and Responsible Consumption," ECONtribute Discussion Papers Series 134, University of Bonn and University of Cologne, Germany.
    4. Thiess Buettner & Annalisa Tassi, 2023. "VAT fraud and reverse charge: empirical evidence from VAT return data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 849-878, June.
    5. Gholami, Ahmad & Abasinejad, Hossein, 2016. "Implementation of Value-Added Tax on Iran Banking Services: An Application of DSGE Model," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(3), pages 283-303, July.
    6. Presiana Nenkova & Angel Angelov, 2019. "Assessing the Effects of Imposing VAT on the Services Provided by the Banking Sector – The Case of Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 124-143.

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    More about this item

    Keywords

    VAT; Financial services; Exemption; General equilibrium; Deadweight loss; Input-output analysis; H24; H25;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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