Assessing the effects of VAT policies with an integrated CGE-microsimulation approach: evidence on Italy

Ali Bayar, Barbara Bratta, Silvia Carta, Paolo Di Caro, Marco Manzo and Carlo Orecchia
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Ali Bayar: EcoMode CESifo
Silvia Carta: Department of Finance Italian Ministry of Economy and Finance
Paolo Di Caro: Department of Law University of Catania Italy - Tax Administration Research Centre University of Essex Business School United Kingdom
Marco Manzo: Department of Finance Italian Ministry of Economy and Finance
Carlo Orecchia: Department of Finance Italian Ministry of Economy and Finance

Working Papers from Ministry of Economy and Finance, Department of Finance

Abstract: Reforming the structure of the Value Added Tax (VAT) is an open issue in different countries, mostly for raising revenues and improving the efficiency of the tax system. However, most of the existing analyses do not combine micro- and macro-modelling tools for assessing the welfare and redistributive effects of VAT reforms. Aspects like tax evasion and erosion, moreover, are usually of secondary importance when studying VAT changes. The objective of this paper is twofold. First, we propose an integrated approach, based on the new dynamic multi-sector, multi-household tax computable general equilibrium (CGE) model (ITAXCGE) recently developed at the Italian Ministry of Economy and Finance, to study a uniform VAT rate reform in Italy. Our empirical approach has the merit of including new information when evaluating VAT reforms: tax evasion and erosion, irregular labour, different household groups, and a detailed structure of taxation. Second, we simulate the effects of a uniform VAT rate reform on welfare and redistribution, by taking into consideration the consequences of such reform on VAT gap changes. Our results suggest that the equity-efficiency trade-off deriving from the reform under investigation is reduced when including information on tax evasion in the analysis. The policy implications of our study are finally discussed

Keywords: Microsimulation; CGE-Modelling; integrated approach; VAT; tax gap. (search for similar items in EconPapers)
JEL-codes: D58 H31 J22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cmp, nep-eur, nep-iue, nep-pbe and nep-pub
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