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Int Tax Public Finance (2014) 21:10281050 DOI 10.1007/s10797-013-9297-5
P O L I C Y WAT C H
Revenue and welfare effects of nancial sector VAT exemption
Thiess Buettner Katharina Erbe
Published online: 7 December 2013 Springer Science+Business Media New York 2013
Abstract This paper provides an analysis of revenue and welfare effects associated with a VAT exemption of nancial services, which is common among OECD countries. We follow a general equilibrium approach that considers effects of repealing the VAT exemption not only on consumer demand and intermediate-input demand for nancial services, but takes account also of the VAT distortion of labor supply. We derive formal expressions for revenue and welfare effects, which can be quantied with a minimum of information about behavioral effects. Using VAT statistics as well as national accounts, we provide quantitative estimates of the effects of repealing the VAT exemption in Germany. Our baseline estimate indicates that tax revenues would increase by some 1.7 billion or 1.3 % of VAT revenues (excluding import turnover tax). Provided these revenue gains are used to nance a reduction in the
VAT rate or in other distortive labor taxes our results indicate a modest welfare gain of about 1 billion, or 0.04 % of GDP.
Keywords VAT Financial services Exemption General equilibrium
Deadweight loss Input-output analysis
JEL Classication H24 H25
1 Introduction
Recent times have seen various policy proposals to change the tax system in order to determine a fair and substantial contribution by the nancial sector (IMF 2010). Some of these proposals may be little more than a political reex to the recent nancial crisis that forced governments in many developed countries into providing large
T. Buettner (
B) K. Erbe
University of ErlangenNuremberg, Lange Gasse 20, 90403 Nuremberg, Germany e-mail: [email protected]
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rescue packages for nancial institutions. However, as a matter of fact, in many countries, nancial institutions are largely exempt from the value-added-tax (VAT). Given the relative size of the nancial industry in some countries, repealing the VAT exemption of nancial services might result in substantial revenue gains. For instance, according to the HMRCs overview of tax expenditures and structural reliefs, in the UK, the largest single VAT exemption is that of nance and...