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Über dieses Buch

This book uses a computable general equilibrium framework to eval­ uate recent value-added tax reform proposals in the European Union from a welfare point of view. After the publication of the "White Paper" (1985) on the completion of the internal European market, an intense and heated debate about tax impediments to free trade set in. According to the original plans of the Commission of the European Union, not only physical border controls but also fiscal frontiers within the European Union would have been abolished on New Year's Day 1993. With respect to value­ added taxation this amounted to replacing the destination by the origin principle. Even though the origin principle had been favored by some economists from the establishment of a common European value-added tax system, time was not yet ripe for this change. In December 1991, the ECOFIN Council could only agree on the so­ called transitional system. In essence, these transitional arrangements maintain the destination principle as far as possible but shift the border tax procedure from national frontiers to firms. The transitional system is supposed to expire on December 31, 1996, with the final solution for value-added taxation in the European Union being decided upon by the ECOFIN Council until December, 1995. In the event of no decision the transitional arrangements will be continued. The most likely solution will be a switch to the origin principle combined with some clearing mechanism to prevent major revenue reallocations between member states.

Inhaltsverzeichnis

Frontmatter

Introduction

Abstract
This book uses a computable general equilibrium framework to evaluate recent value-added tax reform proposals in the European Union from a welfare point of view.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter I. An Introduction to Value-added Taxation

Abstract
The debate about the use of commodity taxation as a means of protectionism is as old as the taxation of commodities itself. There were plenty of quarrels about the alleged discrimination against foreign goods and the distribution of tax revenues between different regions in medieval Europe. In 1158 a quarrel over the salt tax between bishop Otto of Freising and Henry the Lion resulted in the foundation of the city of Munich. Emperor Friedrich Barbarossa, himself, had to decide on a mutually acceptable distribution of salt-tax revenues, preventing a bloody battle at the very last minute. Elsewhere such tax quarrels were not settled so peacefully. The Alcabala, an early form of a sales tax, which was levied in Spain and its dependencies, infuriated Spain’s trading partners to such an extent that Spanish tax collectors abroad were sometimes killed. Although the battle ground has largely moved to the conference table or the courts, tax discrimination between domestic and foreign goods draws just as much attention today as it did in the Middle Ages.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter II. VAT Policy Options for an Integrated Europe

Abstract
In this chapter we discuss the VAT policy options that are applicable in an integrated Europe. We distinguish between three broad policy options. The first presupposes that border controls have been abolished but that international tax barriers have been retained as far as possible. The current transitional VAT system, effective since January 1, 1993, operates in this way. Compliance costs aside, the economic effects of the transitional system depend heavily on the tax treatment of cross-border sales to final consumers. Our preferred interpretation is that either the destination or the origin principle be applied to intra-community sales to private persons whatever taxation principle is of mutual advantage for the vendor and the purchaser in different EU member states. We will call this the “switching option”. In contrast to this, the relevant literature seems to assume that all cross-border sales to final consumers are taxed according to the origin principle under the transitional system. According to this interpretation, the current situation is described as a “mixed system”, taxing trade between registered taxpayers by the DP but applying the OP to cross-border sales to non-registered taxpayers.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter III. Theoretical Foundations

Abstract
In the preceding chapters the main institutional features of various VAT reform options were described and translated into a model-equivalent form. Our ultimate aim is the computation of price, revenue and especially welfare effects when switching from a reference VAT system — which was effective until 1992 — to one of the reform proposals discussed in the preceeding chapter. This corresponds to performing some numerical comparative static experiments. Our main interest, however, is not in the computation but in the economic explanation of the resulting welfare effects. This requires some understanding of the economic mechanisms at work in an equilibrium model. After all, one of the main virtues of CGE modelling is its firm embedment in traditional general equilibrium theory, now the dominant theoretical framework for taxation problems. We therefore have to extend the accounting identities and market equilibrium conditions as outlined in the preceding chapter to a complete general equilibrium model. The reader is assumed to be sufficiently familiar with general equilibrium theory so that the following remarks should suffice.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter IV. From Theory to Application: A Computable General Equilibrium Model

Abstract
We are now equipped with some theoretical insights into the welfare effects of value-added taxes in open economies. We know that international income effects as well as domestic and international substitution effects matter and we have elaborated on the determinants of these effects. Theoretical reasoning alone, however, does not tell us much about the quantitative significance of these effects, which are exactly what we are interested in. Which countries realize welfare gains, and which suffer welfare losses, when the EU switches from one international taxation principle to another? Furthermore we want to know whether or not welfare changes are quantitatively significant, and what counts more for welfare changes, international income effects or efficiency considerations due to substitution effects? In Chapter I we argued that computable general equilibrium (CGE) models were the best way of answering these and related questions. Hence, the aim of the present chapter is to develop and describe our computable general equilibrium model in more detail.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter V. Simulation Results and Economic Interpretations

Abstract
This chapter contains our simulation results and explains them in economic terms. Starting with the data set for 1981, we used the fully specified CGE model from Chapter IV to compute a number of hypothetical (“counterfactual”) equilibria corresponding to different VAT reform options. Using summary statistics, the results are then compared with the original pre-change (“benchmark”) equilibrium. We then try to explain the numerical results in economic terms.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Chapter VI. Summary and Conclusions

Abstract
In the preceeding chapters we used a computable general equilibrium model to evaluate the welfare effects of different VAT reform proposals. When we started our project we were convinced that CGE modelling would be the most appropriate approach for an investigation of the welfare effects of tax reforms in a multi-commodity, multi-country framework. After having finished our work we still believe in the virtues of CGE analysis, but also regard rough-and-ready first round calculations much more favorably than before. The reason is not so much that CGE models have a number of serious drawbacks; these were known to us beforehand. The more disturbing fact is that in most cases first round calculations proved to be reasonable approximations for general equilibrium quantifications.
Hans Fehr, Christoph Rosenberg, Wolfgang Wiegard

Backmatter

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