Revenue and welfare effects of financial sector VAT exemption
- 906 Downloads
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.
KeywordsVAT Financial services Exemption General equilibrium Deadweight loss Input-output analysis
JEL ClassificationH24 H25
- Genser, B., & Winker, P. (1997). Measuring the fiscal revenue loss of VAT exemption in commercial banking. Finanzarchiv, 54, 563–585. Google Scholar
- Grubert, H., & Mackie, J. (1999). Must financial services be taxed under a consumption tax? National Tax Journal, 53, 23–40. Google Scholar
- International Monetary Fund (2010). A fair and substantial contribution by the financial sector: final report for the G-20. http://www.imf.org/external/np/g20/pdf/062710b.pdf.
- Lockwood, B. (2011). Estimates from national accounts data of the revenue effect of imposing VAT on currently exempt sales of financial services companies in the EU. In How the EU VAT exemptions impact the banking sector. PWC-Study. http://www.pwc.com/en_GX/gx/financial-services/pdf/2011-10-18_VAT_Study_final_report.pdf. Google Scholar
- Lockwood, B. (2012). How should financial intermediation services be taxed? Mimeo. Google Scholar
- Mirrlees, J., et al. (2011). Mirrlees review—tax by design. http://www.ifs.org.uk/mirrleesReview/design.
- OECD (2008). Taxing wages 2006/2007. Paris. Google Scholar
- Statistisches Bundesamt (2009). Umsatzsteuerstatistik 2007, Tabelle 2.3 der Jahrespublikation, Fachserie 14 Reihe 8 (ohne innergemeinschaftliche Erwerbe). Wiesbaden. Google Scholar
- Statistisches Bundesamt (2010). Volkswirtschaftliche Gesamtrechnungen, Input-Output-Rechnung 2007, Fachserie 18 Reihe 2. Wiesbaden. Google Scholar