Fiscal Devaluation and Fiscal Consolidation : The VAT in Troubled Times

Author/Editor:

Michael Keen ; Ruud A. de Mooij

Publication Date:

March 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper focuses on two core tax design issues that arise in addressing current fiscal challenges. It first explores the idea, prominent in troubled Eurozone countries, of a "fiscal devaluation": shifting from social contributions to the VAT as a way to mimic a nominal devaluation. Empirical evidence is presented which suggests that in Eurozone countries this may indeed improve the trade balance in the short-run, though, as theory predicts, the effects eventually disappear. The paper then assesses the wider scope for VAT reform in meeting fiscal consolidation needs, developing and beginning to apply a methodology for finding additional VAT revenue in ways less distortionary and fairer than further raising the standard rate.

Series:

Working Paper No. 12/85

Subject:

English

Publication Date:

March 1, 2012

ISBN/ISSN:

9781475502480/1018-5941

Stock No:

WPIEA2012085

Format:

Paper

Pages:

48

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