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
Citation
BAYDUR, Ismail and YILMAZ, Fatih.
VAT treatment of the financial services: Implications for the real economy. (2021). Journal of Money, Credit and Banking. 53, (8), 2167-2200.
Available at: https://ink.library.smu.edu.sg/soe_research/2481
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.
Additional URL
https://doi.org/10.1111/jmcb.12780