Fiscal Devaluation and Fiscal Consolidation: The VAT in Troubled Times
IMF Working Papers, March 1, 2012
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Bibliographic details
- Authors: Michael Keen, Ruud A. de Mooij
- Published: March 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475502480.001
Summary
- Focus: two core tax design issues for current fiscal challenges.
- First issue examined: "fiscal devaluation"—shifting from social contributions to the VAT to mimic a nominal devaluation.
- Empirical evidence (for Eurozone countries):
- Suggests fiscal devaluation may improve the trade balance in the short-run.
- As theory predicts, the effects eventually disappear.
- Second issue examined: wider scope for VAT reform to meet fiscal consolidation needs.
- Develops and begins to apply a methodology for finding additional VAT revenue in ways less distortionary and fairer than further raising the standard rate.
Empirical findings on fiscal devaluation
- Context: Prominent policy idea in troubled Eurozone countries.
- Short-run outcome: Improvement in trade balance associated with shifting taxation from labor (social contributions) to consumption (VAT).
- Medium- to long-run outcome: Effects on the trade balance disappear, consistent with theoretical predictions.
VAT reform methodology and policy implications
- Objective: Identify additional VAT revenue options that are less distortionary and fairer than increasing the standard VAT rate.
- Approach: Develops and begins to apply a methodology for evaluating VAT base and structure reforms.
- Policy implication: VAT reform can be part of fiscal consolidation packages, potentially replacing labor taxation to achieve specific macroeconomic objectives (including temporary competitiveness improvements).
Subject areas and keywords
- Subject: Consumption, Consumption taxes, Exports, Fiscal devaluation, International trade, National accounts, Tax policy, Taxes, Value-added tax
- Keywords: consumer spending, Consumption, Consumption taxes, differenced VAT variable, Europe, Eurozone country, exchange rate, Exports, fiscal devaluation, labor market, reform package, tax reform, trade balance, value-added tax, VAT base, VAT increase, VAT performance, VAT policy, VAT reform, VAT reform package, VAT structure, WP