Competition and Welfare Effects of VAT Exemptions
Christian Jaag (),
Markus Lang () and
Urs Trinkner ()
No 133, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)
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 tax rates. We analyze the effects of such asymmetric tax regimes on market shares, optimal prices, tax receipts, and social welfare. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of such tax exemptions depends on the fraction of VAT-rated inputs versus the fraction of non-rated customers. We further elucidate the main competitive impact of VAT policies while showing their consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. Our paper provides 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)
New Economics Papers: this item is included in nep-acc, nep-mic and nep-pub
References: View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Journal Article: Competition and Welfare Effects of VAT Exemptions (2011)
Working Paper: Competition and Welfare Effects of VAT Exemptions (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:iso:wpaper:0133
Access Statistics for this paper
More papers in Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU) Contact information at EDIRC.
Bibliographic data for series maintained by IBW IT ().