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Competition and welfare effects of VAT exemptions


Dietl, Helmut; Jaag, Christian; Lang, Markus; Trinkner, Urs (2011). Competition and welfare effects of VAT exemptions. B.E. Journal of Economic Analysis & Policy, 11(1):19.

Abstract

istortions under the value-added tax (VAT) arise partly 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. 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 main competitive impacts 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 in the market, consumer surplus, and government tax revenue.

Abstract

istortions under the value-added tax (VAT) arise partly 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. 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 main competitive impacts 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 in the market, consumer surplus, and government tax revenue.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2011
Deposited On:28 Apr 2011 18:50
Last Modified:21 Nov 2017 15:23
Publisher:Berkeley Electronic Press
ISSN:1935-1682
Additional Information:The Berkeley Electronic Press © 2010
Publisher DOI:https://doi.org/10.2202/1935-1682.2855

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