Notes and Communications
Simple Analytics of Setting the Optimal Vat Exemption Threshold
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Summary
This paper presents a simple, explicit formula for setting the optimal VAT exemption threshold that depends on only six parameters: (1) the administrative and compliance costs, (2) the VAT rate, (3) the value-added coefficient, (4) the elasticity of substitution in consumption, (5) the value of government expenditure financed by the VAT revenue, and (6) the VAT/GDP ratio. The formula is derived from an articulated model of utility and profit maximization, and is shown to be capable of yielding reasonable results based on plausible parameter values.
Keywords
exemption threshold optimal taxation VATJEL Classification
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References
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- Keen, M., Mintz, J. 2004The Optimal Threshold for a Value-Added TaxJournal of Public Economics88559576CrossRefGoogle Scholar
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© Springer 2005