Competition and Welfare Effects of VAT Exemptions
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.
|Date of creation:||Sep 2010|
|Date of revision:||Oct 2010|
|Publication status:||Published in B.E. Journal of Economic Analysis & Policy, 11(1):19|
|Contact details of provider:|| Web page: http://www.swiss-economics.ch|
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- Helmut Dietl & Christian Jaag & Markus Lang & Martin Lutzenberger & Urs Trinkner, 2010.
"Impact of VAT Exemptions in the Postal Sector on Competition and Welfare,"
0022, Swiss Economics.
- 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.
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"Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations,"
6121, University Library of Munich, Germany.
- 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.
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- 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.
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- Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association, vol. 59(4), pages 905-28, December.
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