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Competition and Welfare Effects of VAT Exemptions

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Helmut Dietl & Christian Jaag & Markus Lang & Urs Trinkner, 2010. "Competition and Welfare Effects of VAT Exemptions," Working Papers 0133, University of Zurich, Institute for Strategy and Business Economics (ISU).
    • Handle: RePEc:iso:wpaper:0133
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    Cited by:

    1. Christian Jaag & Urs Trinkner & Jeffrey Yusof, 2014. "Assessment of EU Postal Sector Policy during the Second Barroso Administration (2010-2014)," Working Papers 0050, Swiss Economics.
    2. Kristýna Kebrtová & Hana Zídková, 2022. "New VAT Rules for E-commerce: What Will They Bring to Public Budgets?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2022(2), pages 49-68.

    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L87 - Industrial Organization - - Industry Studies: Services - - - Postal and Delivery Services

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