'Fiscal Devaluation' and Fiscal Consolidation: The VAT in Troubled Times
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 quite sizably 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.
We are grateful to Carlo Cottarelli, Alexander Klemm, Daniel Leigh, Jim Poterba, Mick Thackray, and participants in the NBER conference "Fiscal policy after the financial crisis" for useful comments and suggestions. Views expressed here are those of the authors and should not be attributed to the IMF, its Executive Board or management, or the National Bureau of Economic Research.
"Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times, Ruud de Mooij, Michael Keen. in Fiscal Policy after the Financial Crisis, Alesina and Giavazzi. 2013