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Notes and Communications

Simple Analytics of Setting the Optimal Vat Exemption Threshold

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This paper presents a simple, explicit formula for setting the optimal VAT exemption threshold that depends on only six parameters: (1) the administrative and compliance costs, (2) the VAT rate, (3) the value-added coefficient, (4) the elasticity of substitution in consumption, (5) the value of government expenditure financed by the VAT revenue, and (6) the VAT/GDP ratio. The formula is derived from an articulated model of utility and profit maximization, and is shown to be capable of yielding reasonable results based on plausible parameter values.

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References

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Correspondence to Howell H. Zee.

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Zee, H. Notes and Communications. De Economist 153, 461–471 (2005). https://doi.org/10.1007/s10645-005-2662-8

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  • DOI: https://doi.org/10.1007/s10645-005-2662-8

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