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FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value Added Tax on Financial Services

Author

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  • Erbe, Katharina
  • Büttner, Thiess

Abstract

This paper analyzes revenue and welfare effects of implementing a FAT both from a theoretical and a quantitative perspective. The theoretical analysis allows us to derive expressions for the revenue effects and the deadweight loss in a general equilibrium setting, which can be quantified with a minimum of information about the economy and key elasticities. Using data for Germany, the empirical quantification suggests that introducing a modest FAT with a rate of 3% results in a revenue gain of about 1.312 bn. If this revenue gain is used to reduce distorting labor taxes, the results point at a welfare gain of 1.092 bn. Comparing these results with Buettner and Erbe (2012), we find that the introduction of a FAT of 3% would generate similar revenue and welfare effects as a repeal of the financial sector VAT exemption (with a 19% VAT rate). However, taxing financial services through FAT may exert adverse location effects on financial service production.

Suggested Citation

  • Erbe, Katharina & Büttner, Thiess, 2013. "FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value Added Tax on Financial Services," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79959, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc13:79959
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    References listed on IDEAS

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    1. (IFS), Institute for Fiscal Studies & Mirrlees, James (ed.), 2011. "Tax By Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553747.
    2. European Commission, 2010. "Financial Sector Taxation," Taxation Papers 25, Directorate General Taxation and Customs Union, European Commission.
    3. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
    4. Alan J. Auerbach & Roger H. Gordon, 2002. "Taxation of Financial Services under a VAT," American Economic Review, American Economic Association, vol. 92(2), pages 411-416, May.
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    6. Michael Keen, 2011. "Rethinking the Taxation of the Financial Sector ," CESifo Economic Studies, CESifo Group, vol. 57(1), pages 1-24, March.
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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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