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 tax rates. 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 the main competitive impact 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, consumer surplus, and government tax revenue.
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- Jaag, Christian, 2007.
"Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations,"
6121, University Library of Munich, Germany.
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- Christian Jaag, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," Working Papers 0006, Swiss Economics.
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- Michael Keen, 2007.
IMF Working Papers
07/142, International Monetary Fund.
- Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
- Cnossen, Sijbren, 2003. "How Much Tax Coordination in the European Union?," International Tax and Public Finance, Springer, vol. 10(6), pages 625-49, November.
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- 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.
- 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.
- Helmut Dietl & Christian Jaag & Markus Lang & Martin Lutzenberger & Urs Trinkner, 2010. "Impact of VAT Exemptions in the Postal Sector on Competition and Welfare," Working Papers 0145, University of Zurich, Institute for Strategy and Business Economics (ISU).
- Helmut M. Dietl & Urs Trinkner & Reto Bleisch, 2004. "Liberalization and Regulation of the Swiss Letter Market," Working Papers 0001, Swiss Economics, revised Jul 2005.
- 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.
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