Measuring the Efficiency of VAT reforms: Evidence from Slovakia

Andrej Cupak and Peter Tóth

No WP 6/2017, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: We estimate a demand system to simulate the welfare and fiscal impacts of the recent value added tax (VAT) cut on selected foods in Slovakia. We evaluate the efficiency of the tax cut vis-a-vis its hypothetical alternatives using the ratio of the welfare and fiscal impacts. Based on our findings, tax cuts tend to be more efficient if demand for a good is price-elastic or if the good has several complements. The results also indicate that cherry-picking from food sub-categories could have improved the efficiency of the recent tax change. Further, we found potential revenue-neutral welfare-improving tax schemes, namely, a reduced rate on foods financed by an increased rate on non-foods improves welfare in case of most food types. The paper contributes to the literature by demonstrating that standard approximate efficiency indicators of VAT reforms are biased compared with simulation-based results for any plausible degree of a tax change.

Keywords: Consumer behavior; Demand system; QUAIDS; Value added tax; Tax reform; Efficiency; Optimal taxation; Slovakia (search for similar items in EconPapers)
JEL-codes: D12 E21 H21 I31 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2017-09
New Economics Papers: this item is included in nep-acc, nep-cmp, nep-mac, nep-pbe and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1047

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