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The (Non-)Neutrality of Value-Added Taxation

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Thunecke,  Georg
Public Economics, MPI for Tax Law and Public Finance, Max Planck Society;

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Citation

Thunecke, G., Stähler, F., & Schneider, G. (2023). The (Non-)Neutrality of Value-Added Taxation. Working Paper of the Max Planck Institute for Tax Law and Public Finance, No. 2023-20.


Cite as: https://hdl.handle.net/21.11116/0000-000F-3E04-8
Abstract
Border adjustment taxes like the value-added tax (VAT) are commonly regarded as establishing a level playing field for international competition. We employ a structural gravity model to analyse the VAT’s effects on trade in final goods in the European Union (EU). We find that the VAT is defacto non-neutral. A one percentage point VAT increase reduces aggregate imports and internal trade by 3.1% and implies a 1.8 to 5.4% reduction of imports relative to internal trade. Based on these findings, we conduct a counterfactual analysis and illustrate that VAT rate changes simply substantial welfare effects for an average country in the European Union.