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On the Effect of an Increase in the VAT on Electricity in Portugal

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  • Pereira, Alfredo
  • Pereira, Rui

Abstract

In this paper we analyze the budgetary, economic, distributional and environmental effects of a permanent increase in Portugal of the value added tax on electricity spending. The analysis in conducted in the context of a new multi-sector and multi-household dynamic general equilibrium model of the Portuguese economy. Simulation results suggest that a permanent increase in the VAT on electricity from 6% to 23% has positive budgetary and environmental effects but both come at the cost of detrimental economic and distributional effects. As economic performance in Portugal improves and the public budgetary situation becomes less constraining, it is inevitable that pressure will mount for this increase in the VAT rate on electricity to be reversed. This mixed bag of results provides an important element in this debate. Reverting to a VAT tax rate of 6% on electricity, would improve economic performance and have positive distributional effects. From this perspective such reversion would be desirable. The question is then whether or not the public budget can somehow compensate for the loss of revenues in a way that would not eliminate the positive economic and distributional effects of such reversion.

Suggested Citation

  • Pereira, Alfredo & Pereira, Rui, 2017. "On the Effect of an Increase in the VAT on Electricity in Portugal," MPRA Paper 77594, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77594
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    File URL: https://mpra.ub.uni-muenchen.de/77594/1/MPRA_paper_77594.pdf
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    References listed on IDEAS

    as
    1. Pereira, Alfredo M. & Pereira, Rui M., 2014. "On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case," Energy Economics, Elsevier, vol. 42(C), pages 248-261.
    2. Alfredo M. Pereira & Pedro G. Rodrigues, 2004. "Strategies for Fiscal Reform in the Context of the EMU: the Case of Portugal," Review of Development Economics, Wiley Blackwell, vol. 8(1), pages 141-163, February.
    3. Alfredo M. Pereira & Rui M. Pereira, 2014. "Environmental Fiscal Reform and Fiscal Consolidation," Public Finance Review, , vol. 42(2), pages 222-253, March.
    4. Fortes, Patrícia & Pereira, Rui & Pereira, Alfredo & Seixas, Júlia, 2014. "Integrated technological-economic modeling platform for energy and climate policy analysis," Energy, Elsevier, vol. 73(C), pages 716-730.
    5. Simões, Sofia & Cleto, João & Fortes, Patri­cia & Seixas, Júlia & Huppes, Gjalt, 2008. "Cost of energy and environmental policy in Portuguese CO2 abatement--scenario analysis to 2020," Energy Policy, Elsevier, vol. 36(9), pages 3598-3611, September.
    6. Alfredo Marvão Pereira & Rui M. Pereira, 2013. "Environmental Fiscal Reform and Fiscal Consolidation: The Quest for the Third Dividend in Portugal," Working Papers 114, Department of Economics, College of William and Mary.
    7. Alfredo Marvão Pereira & Rui M. Pereira, 2012. "DGEP - A Dynamic General Equilibrium Model of the Portuguese Economy: Model Documentation," Working Papers 127, Department of Economics, College of William and Mary.
    8. Pedro G. Rodrigues & Alfredo M. Pereira, 2000. "On The Impact Of A Tax Reform Package In Portugal," Computing in Economics and Finance 2000 353, Society for Computational Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Value Added Tax on Electricity; Dynamic Multi-Sector General Equilibrium; Portugal;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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