Revenue and welfare effects of financial sector VAT exemption

Buettner, Thiess; Erbe, Katharina

doi:10.1007/s10797-013-9297-5

Cited by 14 publications

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“…To assess revenue and welfare effects of imposing a FAT we adapt the approach of Buettner and Erbe (2012). While the theoretical model is, basically, the same, we do not consider a tax reform which repeals the VAT exemption of financial services but a reform which imposes a tax on the labor input purchased by the financial sector.…”

Section: Modeling Revenue and Welfare Effects Of The Fatmentioning

confidence: 99%

“…To simplify matters we ignore the existence of unrecoverable input taxes arising under VAT exemption of financial services. While views differ regarding the extent to which unrecoverable input taxes are significant, Buettner and Erbe (2012) provide estimates according to which most of the input taxes can actually be shifted to the taxed part of the financial sector. Since unrecoverable input taxes are of secondary importance in our setting, we simplify the subsequent analysis by assuming that all input taxes are deductible.…”

Section: Revenue Effectsmentioning

confidence: 99%

“…Summing up DW L 1 and DW L 2 , the total welfare effect is a gain of e 5.608 bn. Buettner and Erbe (2012). Welfare effect is based on the assumption that revenues are used to lower labor taxes.…”

Section: Welfare Effectsmentioning

confidence: 99%

“…The empirical literature has pointed at substantial revenue gains that a repeal of the VAT exemption might generate (Genser andWinker, 1998, Huizinga, 2002) and also the recent Mirrlees report notes the revenue potential (Mirrlees, et al, 2011). Other papers have reconsidered the empirical evidence and found weaker revenue gains (Buettner and Erbe, 2012) or even revenue losses (Lockwood, 2011).…”

Section: Introductionmentioning

confidence: 99%

“…Others have argued that consumption of financial services should not be treated like any other consumer good (e.g., Grubert andMackie, 1999, Lockwood, 2012). Assuming that consumption of financial services does not show a particularly large degree of substitution with leisure, Buettner and Erbe (2012) provide an analysis of the welfare effects and find small welfare gains of a revenue neutral repeal of the VAT exemption of financial services.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value-Added Tax on Financial Services

Erbe¹,

Büttner²

2015

Taxation and Regulation of the Financial Sector

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Terms of use: Documents in EconStor mayThis paper analyzes revenue and welfare effects of implementing a FAT both from a theoretical and a quantitative perspective. The theoretical analysis allows us to derive expressions for the revenue effects and the deadweight loss in a general equilibrium setting, which can be quantified with a minimum of information about the economy and key elasticities. Using data for Germany, the empirical quantification suggests that introducing a modest FAT with a rate of 3% results in a revenue gain of about e 1.312 bn. If this revenue gain is used to reduce distorting labor taxes, the results point at a welfare gain of e 1.092 bn. Comparing these results with Buettner and Erbe (2012), we find that the introduction of a FAT of 3% would generate similar revenue and welfare effects as a repeal of the financial sector VAT exemption (with a 19% VAT rate). However, taxing financial services through FAT may exert adverse location effects on financial service production.

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Section: Modeling Revenue and Welfare Effects Of The Fatmentioning

confidence: 99%

Section: Revenue Effectsmentioning

confidence: 99%

Section: Welfare Effectsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value-Added Tax on Financial Services

Erbe¹,

Büttner²

2015

Taxation and Regulation of the Financial Sector

Self Cite

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Goods and Services Tax (GST) Transition to Sales and Services Tax (SST): Impact on the Welfare of B40 and M40 Households in Malaysia

Saidi

Harun

2020

Charting a Sustainable Future of ASEAN in Business and Social Sciences

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How should payment services be taxed?

Lockwood

Yerushalmi

2019

Soc Choice Welf

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This paper considers the design of taxes on real money balances and bank payment services, when realistically, the household can use either cash or a bank payment account for the purchase of different varieties of goods. These taxes, plus a consumption tax, fund a government revenue requirement. We find that generally, real money balances and bank transaction fees should be taxed, and at different rates, i.e. the tax system should not leave the choice of payment services undistorted. For a wide class of time transactions cost technologies, including the Baumol-Tobin case, fees should be taxed at a lower rate than real money balances, and the tax on real money balances should be positive. However, it is possible that fees should be subsidized. The rate of tax on fees has no simple relationship to the optimal consumption tax, and can be higher or lower. A Corlett-Hague type intuition for these results is also developed, which relies on the concept of a virtual time endowment.JEL Classification G21 · H21 · H25 ) which consider a transactions cost theory of money demand, or Chari et al. (1991, 1996), where some goods can be bought on costless credit. More recent models include a more micro-founded search theoretic demand for fiat money e.g. Aruoba and Chugh (2010), but existing models of this type do not include a banking sector. The literature is surveyed in Kocherlakota (2005) and Schmitt-Grohe and Uribe (2010). 2 As a result of these trends, the provision of payment services is an increasing source of both activity and profit for banks and payment network operators, such as VISA and Mastercard. For example, in the United States, the fee averages approximately 2% of transaction value. This is giving rise to large and growing revenues and profits for both banks and the operators. For example, DeYoung and Rice (2004) estimate that in the US in 2003, non-interest income accounted for half of all bank income, and 52% of non-interest income was generated by fees associated with payment accounts. Visa, the largest payment network operator, had gross income and profit of $18.36 bln. and $11.69 bln. in the 2017 financial year. 4 On average, in the EU, consumption is about 70% of GDP. Also, as a rough approximation, about 50% of total transactions are non-cash. So, the percentage is 1%/(0.7 × 0.5)=2.8%. 5 So, a payment account is what is known as a checking account in the USA, and a current account in the UK. 6 These fees are known as merchant discount fees. The bulk of this is made up of a change for card use by the card-issuing bank, known as the interchange fee, and the reminder of the merchant discount fee goes to the card company and the acquiring bank. 7 This is discussed formally in Sect. 3.4.

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Revenue and welfare effects of financial sector VAT exemption

Cited by 14 publications

References 10 publications

FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value-Added Tax on Financial Services

FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value-Added Tax on Financial Services

Goods and Services Tax (GST) Transition to Sales and Services Tax (SST): Impact on the Welfare of B40 and M40 Households in Malaysia

How should payment services be taxed?

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