The (Non-)Neutrality of Value-Added Taxation

Abstract: This paper employs a structural gravity model and novel value-added tax (VAT) regime
data to investigate the impact of VAT rate changes on imports and domestic production
of nal goods. We nd that the VAT is both non-neutral and de facto discriminatory.
A one percentage point VAT increase reduces aggregate imports and internal trade by
3.1 % and implies a 1.8 to 5.4 % reduction of foreign imports relative to internal trade.
Based on these results we conduct a counterfactual equilibrium analysis and illustrate
that VAT rate changes imply substantial welfare e ects for an average country in the
European Union. (pdf)