IMF Working Papers

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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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. 2012/085

Subject:

Consumption Consumption taxes Exports Fiscal devaluation International trade National accounts Tax policy Taxes Value-added tax