EXEMPTION VERSUS ZERO RATING - A HIDDEN PROBLEM OF VAT

We examine the difference between exemptions and zero rating under a consumption based VAT in a Numerical General Equilibrium Model. To allow for a better understanding of the accruing efficiency effects, we first develop a method to convert the nominal VAT rates into effective tax rates on categories of final demand. Then we show how these effective tax rates can be used to perform a gradual transition from exemption to zero rating. © 1991.