NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International VAT Harmonization: Economic Effects

Jacob A. Frenkel, Assaf Razin, Steve Symansky

NBER Working Paper No. 3656
Issued in March 1991
NBER Program(s):   ITI   PE   IFM

This paper highlights macroeconomic issues pertinent to the understanding of the international and domestic effects of international VAT harmonization. It outlines elements of the policies of VAT harmonization envisaged for Europe of 1992, and develops a basic tax model which is suitable for the analysis of the incentive effects of various tax policies and their welfare implications. The model emphasizes the effects of changes in the time profile of the various taxes on the intertemporal allocations of savings, investment, and labor. Dynamic simulations reveal that the macroeconomic and welfare implications of VAT harmonization depend critically on the tax system and on the degree of substitution governing temporal and intertemporal allocations. In this context we consider several forms of income (cash flow, labor income, and capital income taxes) as well as tax systems embodying various saving and investment incentives. The simulations also reveal the potential conflicts of interest, within each country and between countries, that can arise from VAT harmonization.

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Document Object Identifier (DOI): 10.3386/w3656

Published: IMF Staff Papers, Vol. 38, December 1991.

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