Publication Type

Journal Article

Version

submittedVersion

Publication Date

12-2021

Abstract

Financial institutions are exempt from the value-added tax (VAT) in most countries. We develop a general equilibrium model with endogenous firm entry and a banking sector to accommodate three key distortions related to exempt treatment: (i) self-supply bias in the banking sector, (ii) under-taxation of payment services, and (iii) input distortions in the business sector and tax cascading. We calibrate our model to the average of Germany, France, and the UK data. Our results show that repealing exempt treatment always increases tax revenues. However, welfare gains occur only at low VAT rates due to the hump-shaped VAT Laffer curve.

Keywords

VAT, Financial Services, Exempt Treatment, Laffer Curve, Heterogeneous Firms

Discipline

Finance | Taxation

Research Areas

Applied Microeconomics

Publication

Journal of Money, Credit and Banking

Volume

53

Issue

8

First Page

2167

Last Page

2200

ISSN

0022-2879

Identifier

10.1111/jmcb.12780

Publisher

Wiley

Embargo Period

7-14-2021

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1111/jmcb.12780

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