Prof. Dr. Frank Stähler (University Tübingen)
This paper employs a structural gravity model for final goods trade and novel VAT regime data to investigate the impact of value-added taxes (VATs) on final goods imports and domestic production of final goods. We show that a VAT increase does not only reduce imports and internal trade of final goods but also leads to a relative increase in internal trade compared to aggregate imports. This result can only be explained by changes in pre-tax pricing behavior. A conservative quantification shows that a 1% increase in the VAT rate implies a welfare loss of 1.6 to 3.2 % in the European Union.
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