Publication Type
Working Paper
Version
publishedVersion
Publication Date
2-2017
Abstract
This paper studies the effects of exempt treatment of financial services under a VATsystem. We develop a general equilibrium model with elastic labor supply, endogenous entry, anda banking sector. The banking sector provides loan services to producers and payment servicesto consumers. Our model display three key distortions under exempt treatment: (i) self-supplybias in the banking sector, (ii) consumption distortions, (iii) input distortions and tax cascading.Then, we calibrate our model to match the salient features of the tax system EU countries. Atax neutral policy regime switch from exempt treatment to full-taxation in loan services improveswelfare about 4%. Shutting down the entry margin has even bigger welfare gains. The same policyexercise for payment services also implies welfare gains and these gains greater than zero rating ofpayment services.
Keywords
VAT, Financial Services, Exempt Treatment, General Equilibrium, Heterogeneous Firms
Discipline
Finance | Taxation
Research Areas
Applied Microeconomics
First Page
1
Last Page
31
Citation
BAYDUR, Ismail and YILMAZ, Fatih.
VAT Treatment of Financial Institutions. (2017). 1-31.
Available at: https://ink.library.smu.edu.sg/soe_research/2033
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
Published in Journal of Money, Credit and Banking, 2021, DOI: 10.1111/jmcb.12780. See https://ink.library.smu.edu.sg/soe_research/2481