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Economic effects of VAT reforms in Germany

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In the tax policy debate, differentiation of value-added taxes (VAT) is often justified by distributional concerns. Our quantitative analysis for Germany indicates that such concerns are misplaced. We find that the abolition of VAT differentiation has only negligible redistributive effects. Instead, reduced VAT rates are found to act as industry-specific subsidies. Whereas the overall welfare effects of pure VAT reforms are very small, a revenue-neutral introduction of a harmonized VAT combined with reductions in the marginal income tax rates or social security contributions turns out to yield substantial welfare gains for all households.

Document Type: Research Article


Affiliations: 1: Netherlands Bureau for Economic Policy Analysis (CPB), Den Haag, The Netherlands 2: Department of Economics, University of Oldenburg, Germany,Centre for European Economic Research (ZEW), Mannheim, Germany 3: IFO Institute and Department of Economics, Munich University, Germany 4: Calculus Consult, Plochingen, Germany

Publication date: 2010-07-01

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