A Multi-Sectoral Model for Estimating VAT Revenues in Hungary
Most Central and Eastern European countries have recently replaced the traditional turnover tax system, with its multiplicity of rates, with a value added tax (VAT). Since the VAT is a major source of tax revenue, it is important to have a reasonably accurate means of estimating the base and potential revenue. When exports are exempted and a credit for capital investment is allowed, the VAT is essentially a retail sales tax and can be estimated from sales. However, once a number of exemptions is added, estimation becomes more complex. Taxes are not paid on exempt goods, but neither is a credit received for purchases of exempt goods. Exempt goods must be taken out of the taxable base, but when an exempt good is purchased to produce a taxable good, it must be added back in.
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