Competition and Welfare Effects of VAT Exemptions

Helmut Dietl, Christian Jaag, Markus Lang and Urs Trinkner

No 24, Working Papers from Swiss Economics

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 VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.

Keywords: Value-added tax; indirect taxation; tax regulation; tax exemption; universal service obligation; postal sector (search for similar items in EconPapers)
JEL-codes: H21 H25 L51 L87 (search for similar items in EconPapers)
Date: 2010-09, Revised 2010-10
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in B.E. Journal of Economic Analysis & Policy, 11(1):19

Downloads: (external link)
http://www.swiss-economics.ch/RePEc/files/0024DietlJaagLangTrinkner.pdf

Related works:
Journal Article: Competition and Welfare Effects of VAT Exemptions (2011)
Working Paper: Competition and Welfare Effects of VAT Exemptions (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:chc:wpaper:0024

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