The (Non-)Neutrality of Value-Added Taxation
Published in CESifo Working Paper No. 9663, 2023
The value-added tax (VAT) is commonly regarded to be non-distortionary due to its de jure trade neutrality. We analyze the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019, and we find that the VAT is de facto non-neutral. Using a gravity approach, we show that a one percentage point VAT increase implies a 5.45% reduction of foreign imports relative to internal trade. While institutional quality, EU accession, and preferential Common Market access cannot explain the over-proportionate reduction in imports, we provide evidence that foreign firm exit drives non-neutrality.
JEL Classification: F10, F14, H24
Keywords: Value-added taxation, trade neutrality, discrimination, border adjustment
Recommended citation: Schneider, G., Stähler, F., and Thunecke, G. U. (2023). "The (Non-)Neutrality of Value-Added Taxation." CESifo Working Paper No. 9663.
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