Fiscal Devaluation and Fiscal Consolidation: The VAT in Troubled Times

Michael Keen and Ruud de Mooij

No 2012/085, IMF Working Papers from International Monetary Fund

Abstract: This paper focuses on two core tax design issues that arise in addressing current fiscal challenges. It first explores the idea, prominent in troubled Eurozone countries, of a "fiscal devaluation": shifting from social contributions to the VAT as a way to mimic a nominal devaluation. Empirical evidence is presented which suggests that in Eurozone countries this may indeed improve the trade balance in the short-run, though, as theory predicts, the effects eventually disappear. The paper then assesses the wider scope for VAT reform in meeting fiscal consolidation needs, developing and beginning to apply a methodology for finding additional VAT revenue in ways less distortionary and fairer than further raising the standard rate.

Keywords: WP; exchange rate; trade balance; consumer spending; labor market; fiscal devaluation; value-added tax; tax reform; VAT increase; VAT reform; differenced VAT variable; Eurozone country; VAT policy; VAT reform package; VAT performance; reform package; VAT structure; VAT base; Exports; Consumption taxes; Consumption; Europe (search for similar items in EconPapers)
Pages: 48
Date: 2012-03-01
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Citations: View citations in EconPapers (69)

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Related works:
Chapter: "Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times (2012)
Working Paper: 'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times (2012)
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