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Competition and Welfare Effects of VAT Exemptions

Author

Listed:
  • Helmut Dietl
  • Christian Jaag
  • Markus Lang
  • Urs Trinkner

Abstract

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 VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.

Suggested Citation

  • Helmut Dietl & Christian Jaag & Markus Lang & Urs Trinkner, 2010. "Competition and Welfare Effects of VAT Exemptions," Working Papers 0024, Swiss Economics, revised Oct 2010.
    • Handle: RePEc:chc:wpaper:0024
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    References listed on IDEAS

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    1. Seade, J, 1985. "Profitable Cost Increases and the Shifting of Taxation : Equilibrium Response of Markets in Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 260, University of Warwick, Department of Economics.
    2. Donald S. Kenkel, 2005. "Are Alcohol Tax Hikes Fully Passed Through to Prices? Evidence from Alaska," American Economic Review, American Economic Association, vol. 95(2), pages 273-277, May.
    3. Helmut Dietl & Christian Jaag & Markus Lang & Martin Lutzenberger & Urs Trinkner, 2011. "Impact of VAT Exemptions in the Postal Sector on Competition and Welfare," Chapters, in: Michael A. Crew & Paul R. Kleindorfer (ed.), Reinventing the Postal Sector in an Electronic Age, chapter 19, Edward Elgar Publishing.
    4. Giesecke, James A. & Nhi, Tran Hoang, 2010. "Modelling value-added tax in the presence of multi-production and differentiated exemptions," Journal of Asian Economics, Elsevier, vol. 21(2), pages 156-173, April.
    5. Michael Keen, 2007. "VAT attacks!," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 365-381, August.
    6. De Donder Philippe & Cremer Helmuth & Dudley Paul & Rodriguez Frank, 2009. "On the Value Added Taxation Status of National Postal Operators," Review of Network Economics, De Gruyter, vol. 8(3), pages 1-22, September.
    7. Helmut M. Dietl & Urs Trinkner & Reto Bleisch, 2005. "Liberalization and Regulation of the Swiss Letter Market," Topics in Regulatory Economics and Policy, in: Michael A. Crew & Paul R. Kleindorfer (ed.), Regulatory and Economic Challenges in the Postal and Delivery Sector, chapter 0, pages 53-72, Springer.
    8. Christian Jaag, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(III), pages 261-282, September.
    9. Christian Jaag & Urs Trinkner, 2010. "The interaction of universal service costing and financing in the postal sector: A calibrated approach," Working Papers 0019, Swiss Economics.
    10. Cnossen, Sijbren, 2003. "How Much Tax Coordination in the European Union?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 625-649, November.
    11. Jaag Christian, 2011. "Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations," Review of Network Economics, De Gruyter, vol. 10(1), pages 1-19, March.
    12. Sijbren Cnossen, 1998. "Global Trends and Issues in Value Added Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(3), pages 399-428, July.
    13. Keen, Michael & Lockwood, Ben, 2006. "Is the VAT a Money Machine?," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 905-928, December.
    14. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
    15. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
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    Cited by:

    1. Christian Jaag & Urs Trinkner & Jeffrey Yusof, 2014. "Assessment of EU Postal Sector Policy during the Second Barroso Administration (2010-2014)," Working Papers 0050, Swiss Economics.
    2. Kristýna Kebrtová & Hana Zídková, 2022. "New VAT Rules for E-commerce: What Will They Bring to Public Budgets?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2022(2), pages 49-68.

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    More about this item

    Keywords

    Value-added tax; indirect taxation; tax regulation; tax exemption; universal service obligation; postal sector;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L87 - Industrial Organization - - Industry Studies: Services - - - Postal and Delivery Services

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