Increasing the substitution elasticity can improve VAT compliance and social welfare

Giuseppe Bognetti and Michele Santoni

Economic Modelling, 2016, vol. 58, issue C, 293-307

Abstract: This paper presents a model of Value Added Tax (VAT) evasion in a monopolistically competitive closed economy. The paper shows that an increase in the intra-brand elasticity of substitution can lower output VAT evasion when under-reporting of final sales and input VAT credits occur jointly. Because of the improvement in VAT compliance, equilibrium prices will fall and VAT revenues will rise both in the short and in the long run. Disentangling the love of variety and the elasticity of substitution utility parameters, it turns out that, in a symmetric general equilibrium solution with free entry and exit of firms, an increase in the substitution elasticity is welfare improving when love of variety is not too strong.

Keywords: Monopolistic competition; VAT evasion (search for similar items in EconPapers)
JEL-codes: H26 L11 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999316301687
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:58:y:2016:i:c:p:293-307

DOI: 10.1016/j.econmod.2016.06.005

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().