CoPS/IMPACT Working Paper Number G-182

Title: Modelling Value-Added Tax in the Presence of Multiproduction and Differentiated Exemptions

Authors: James Giesecke and Nhi Hoang Tran


We develop a framework for economy-wide modelling of value-added tax systems. Our framework models a number of complexities of VAT systems as they are implemented by tax agencies. In particular, we model multiple rates, multiple exemptions, multiple degrees of refundability across commodity users, and multi-product enterprises. A detailed VAT framework, such as that which we present in this paper, is important for correct modelling of VAT within a general equilibrium model. Such a framework is also of value in correctly calculating the distribution of indirect tax payments in CGE model databases, a prerequisite of accurate welfare impact calculations. We use the model to analyse the effects of simplifying Vietnam's complex VAT system. We simplify the system by moving from three tax rates to one budget-neutral rate, while also removing many discretionary exemptions. We find that the policy lifts real private consumption spending, our welfare measure, by an average of 0.9 per cent over our simulation period, 2008-2018.

JEL classification: C68, H25, H21.

Please cite the later published version in:
Journal of Asian Economics, 2010, Vol. 21(2), pp. 156-173.

Keywords: value added tax, dynamic CGE model, Vietnam, indirect tax reform.

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