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Competition and Welfare Effects of VAT Exemptions

  • Helmut Dietl

    ()

    (Institute for Strategy and Business Economics, University of Zurich)

  • Christian Jaag

    ()

    (Institute of Public Finance and Fiscal Law, University of St. Gallen)

  • Markus Lang

    ()

    (Institute for Strategy and Business Economics, University of Zurich)

  • Urs Trinkner

    ()

    (Institute for Strategy and Business Economics, University of Zurich)

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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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/133_ISU_full.pdf
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Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0133.

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Length: 26 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:iso:wpaper:0133
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  1. Michael Keen, 2007. "VAT Attacks!," IMF Working Papers 07/142, International Monetary Fund.
  2. Jaag, Christian, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," MPRA Paper 6121, University Library of Munich, Germany.
  3. 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).
  4. James Giesecke & Nhi Hoang Tran, 2009. "Modelling Value-Added Tax in the Presence of Multiproduction and Differentiated Exemptions," Centre of Policy Studies/IMPACT Centre Working Papers g-182, Victoria University, Centre of Policy Studies/IMPACT Centre.
  5. Cnossen, Sijbren, 2003. "How Much Tax Coordination in the European Union?," International Tax and Public Finance, Springer, vol. 10(6), pages 625-49, November.
  6. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association, vol. 59(4), pages 905-28, December.
  7. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
  8. Sijbren Cnossen, 1998. "Global Trends and Issues in Value Added Taxation," International Tax and Public Finance, Springer, vol. 5(3), pages 399-428, July.
  9. Helmut M. Dietl & Urs Trinkner & Reto Bleisch, 2004. "Liberalization and Regulation of the Swiss Letter Market," Working Papers 0001, Swiss Economics, revised Jul 2005.
  10. 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.
  11. 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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