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FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value Added Tax on Financial Services

  • Erbe, Katharina
  • Büttner, Thiess

This paper analyzes revenue and welfare effects of implementing a FAT both from a theoretical and a quantitative perspective. The theoretical analysis allows us to derive expressions for the revenue effects and the deadweight loss in a general equilibrium setting, which can be quantified with a minimum of information about the economy and key elasticities. Using data for Germany, the empirical quantification suggests that introducing a modest FAT with a rate of 3% results in a revenue gain of about 1.312 bn. If this revenue gain is used to reduce distorting labor taxes, the results point at a welfare gain of 1.092 bn. Comparing these results with Buettner and Erbe (2012), we find that the introduction of a FAT of 3% would generate similar revenue and welfare effects as a repeal of the financial sector VAT exemption (with a 19% VAT rate). However, taxing financial services through FAT may exert adverse location effects on financial service production.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79959.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79959
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Genser, Bernd & Winker, Peter, 1997. "Measuring the fiscal revenue loss of VAT exemption in commercial banking," Discussion Papers, Series II 342, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  2. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
  3. European Commission, 2010. "Financial Sector Taxation," Taxation Papers 25, Directorate General Taxation and Customs Union, European Commission.
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