Vat Notches

53 Pages Posted: 19 May 2015

See all articles by Li Liu

Li Liu

University of Oxford - Oxford University Centre for Business Taxation; University of Oxford - Said Business School

Ben Lockwood

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

We develop a conceptual framework which captures the effect of the VAT system on profit by two effective taxes. This allows (i) predictions of the determinants of voluntary registration and bunching at the registration threshold; (ii) develops a formula for estimating the elasticity of value-added with respect to the statutory tax. We show that the marginal excess burden of the tax on suppliers is measured by this elasticity, extending Feldstein's analysis of the elasticity of taxable income to an indirect tax setting. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, voluntary registration is positively related to the intensity of input use and negatively related to the share of B2C transactions. There is bunching at the VAT threshold, and the amount of bunching is negatively related to the intensity of input use and positively related to the share of B2C transactions, again consistently with the theory. We provide an estimate of the elasticity of the VAT tax base in the range of 0.09 and 0.18.

Keywords: bunching, elasticity, tax notches, VAT, voluntary registration

JEL Classification: H25, H32

Suggested Citation

Liu, Li and Lockwood, Ben, Vat Notches (May 2015). CEPR Discussion Paper No. DP10606, Available at SSRN: https://ssrn.com/abstract=2608064

Li Liu (Contact Author)

University of Oxford - Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Ben Lockwood

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8906 (Phone)
+44 24 7657 2548 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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