International Tax and Public Finance

, Volume 21, Issue 6, pp 1028–1050 | Cite as

Revenue and welfare effects of financial sector VAT exemption

Policy Watch

Abstract

This paper provides an analysis of revenue and welfare effects associated with a VAT exemption of financial 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 financial services, but takes account also of the VAT distortion of labor supply. We derive formal expressions for revenue and welfare effects, which can be quantified 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 finance 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 Classification

H24 H25 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.University of Erlangen–NurembergNurembergGermany

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