Competition and Welfare Effects of VAT Exemptions

University of Zurich, Institute for Strategy and Business Economics, Working Paper No. 133

26 Pages Posted: 28 Sep 2010 Last revised: 7 Oct 2010

See all articles by Helmut M. Dietl

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW)

Christian Jaag

Swiss Economics; University of St. Gallen - Institute of Public Finance and Fiscal Law

Markus Lang

University of Lausanne - Faculty of Social and Political Sciences

Urs Trinkner

University of Zurich - Department of Business Administration (IBW)

Date Written: September 27, 2010

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 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

JEL Classification: H21, H25, L51, L87

Suggested Citation

Dietl, Helmut M. and Jaag, Christian Yvo and Lang, Markus and Trinkner, Urs, Competition and Welfare Effects of VAT Exemptions (September 27, 2010). University of Zurich, Institute for Strategy and Business Economics, Working Paper No. 133, Available at SSRN: https://ssrn.com/abstract=1683595 or http://dx.doi.org/10.2139/ssrn.1683595

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Christian Yvo Jaag

Swiss Economics ( email )

Stampfenbachstr. 142
Zurich, CH-8006
Switzerland

University of St. Gallen - Institute of Public Finance and Fiscal Law ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland

Markus Lang (Contact Author)

University of Lausanne - Faculty of Social and Political Sciences

Quartier UNIL-Centre
Synathlon
Lausanne, 1015
Switzerland

Urs Trinkner

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

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