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Contracting out: The Importance of a Solution for the VAT Distortion

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  • M.C. Wassenaar
  • R.H.J.M. Gradus

Abstract

In member states of the European Union, the current VAT treatment of activities of public authorities creates significant distortions in their decision-making between public provision and contracting out of public services. In several EU-member states, a refund of VAT to local governments eliminates this effect. Therefore, these VAT refund schemes facilitate contracting out. In member states with a refund scheme for the VAT costs of local governments or another solution to this distortion, in general refuse collection is contracted out to a relatively greater extent compared to member states without. Despite these solutions, the VAT distortion is still relevant for private suppliers of tax-exempt activities and public suppliers in other member-states. This distortion could be addressed by a change in the European VAT legislation. (JEL H25; H32)

Suggested Citation

  • M.C. Wassenaar & R.H.J.M. Gradus, 2004. "Contracting out: The Importance of a Solution for the VAT Distortion," CESifo Economic Studies, CESifo, vol. 50(2), pages 377-396.
    • Handle: RePEc:oup:cesifo:v:50:y:2004:i:2:p:377-396.
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    File URL: http://hdl.handle.net/10.1093/cesifo/50.2.377
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    Citations

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    Cited by:

    1. Bird, Richard M. & Mintz, Jack M. & Wilson, Thomas A., 2006. "Coordinating Federal and Provincial Sales Taxes: Lessons From the Canadian Experience," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 889-903, December.
    2. Marko Krause & Alexander Lahmann, 2023. "The tax advantage of public firms over private firms in the German household solid waste disposal industry," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 94(2), pages 549-574, June.
    3. Panu Poutvaara & Andreas Wagener, 2008. "Why is the public sector more labor-intensive? A distortionary tax argument," Journal of Economics, Springer, vol. 94(2), pages 105-124, July.
    4. 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.
    5. Leon Bettendorf & Sijbren Cnossen, 2014. "The Long Arm of the European VAT, Exemplified by the Dutch Experience," CESifo Working Paper Series 4730, CESifo.
    6. Kelly D. Edmiston & Richard M. Bird, 2007. "Taxing Consumption in Jamaica," Public Finance Review, , vol. 35(1), pages 26-56, January.
    7. Sijbren Cnossen, 2012. "Taxing Consumption or Income: Du Pareil au Meme," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(13), March.
    8. Copenhagen Economics & KPMG, 2011. "VAT in the Public Sector and Exemptions in the Public Interest," Taxation Studies 0037, Directorate General Taxation and Customs Union, European Commission.
    9. Sijbren Cnossen, 2022. "The C-inefficiency of the EU-VAT and what can be done about it," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 215-236, February.
    10. Wassenaar, M.C. & Dijkgraaf, E. & Gradus, R.H.J.M., 2007. "Contracting out: Dutch municipalities reject the solution for the VAT-distortion," Serie Research Memoranda 0003, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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