Contracting out: Dutch municipalities reject the solution for the VAT-distortion

M.C. Wassenaar, Elbert Dijkgraaf and Raymond Gradus ()
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M.C. Wassenaar: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 3, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: In 2003, the Dutch government introduced a VAT-compensation fund in order to create a level-playing field for local governments with respect to Value Added Tax (VAT). By introducing this fund the tax difference between governments that supply services themselves and governments that contract out to the private sector was eliminated. This paper shows, however, that according to most of the municipalities differences in VAT treatment did not hinder the contracting out of public services. Therefore, the fund lacks a great deal of its legitimacy. More important, the fund is not effective, as the number of contracted public services has hardly increased since the introduction. In general, municipalities have a negative opinion about this fund. They state that more than the budgetary effects, other arguments are relevant in the decision-making on the outsourcing of activities such as the quality of services and the employment in the own municipality. As the budgetary position for a number of municipalities will decline in the near future, the fund still may stimulate the outsourcing of public services in future.

Keywords: VAT; Contracting out; Municipalities; Compensation fund (search for similar items in EconPapers)
JEL-codes: H25 H32 L33 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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