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Competition and Welfare Effects of VAT Exemptions

  • Helmut Dietl
  • Christian Jaag

    ()

  • Markus Lang
  • Urs Trinkner

    ()

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

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File URL: http://www.swiss-economics.ch/RePEc/files/0024DietlJaagLangTrinkner.pdf
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Paper provided by Swiss Economics in its series Working Papers with number 0024.

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Date of creation: Sep 2010
Date of revision: Oct 2010
Publication status: Published in B.E. Journal of Economic Analysis & Policy, 11(1):19
Handle: RePEc:chc:wpaper:0024
Contact details of provider: Web page: http://www.swiss-economics.chEmail:


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  1. Michael Keen, 2007. "VAT Attacks!," IMF Working Papers 07/142, International Monetary Fund.
  2. 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.
  3. 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.
  4. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
  5. Giesecke, James A. & Tran, Nhi Hoang, 2009. "Modelling value-added tax in the presence of multiproduction and differentiated exemptions," MPRA Paper 13914, University Library of Munich, Germany.
  6. Cnossen, Sijbren, 2003. "How Much Tax Coordination in the European Union?," International Tax and Public Finance, Springer, vol. 10(6), pages 625-49, November.
  7. Jaag, Christian, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," MPRA Paper 6121, University Library of Munich, Germany.
  8. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association, vol. 59(4), pages 905-28, December.
  9. 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.
  10. Sijbren Cnossen, 1998. "Global Trends and Issues in Value Added Taxation," International Tax and Public Finance, Springer, vol. 5(3), pages 399-428, July.
  11. Helmut M. Dietl & Urs Trinkner & Reto Bleisch, 2004. "Liberalization and Regulation of the Swiss Letter Market," Working Papers 0001, Swiss Economics, revised Jul 2005.
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