Tax Reforms and Network Effects

Resumo

This paper investigates the effects of a tax reform that eliminates tax rate heterogeneity
 and cumulative taxation using a general equilibrium model that includes multiple sectors
 with market power. Industries are connected through input-output linkages, and changes in
 tax costs are not confined within industries. The tax reform shocks propagate through the
 production network, which may amplify or mitigate their results. We calibrate the model
 to Brazil, a country with a highly distorted tax system. The revenue-neutral tax reform
 generates gains of 7.8% of GDP and 1.9% of welfare. Just eliminating Value-Added Tax
 (VAT) rate dispersion leads to a 5.9% increase in GDP. As expected, sectors that were
 heavily taxed prior to the reform, as well as their suppliers, benefit the most. Yet, due to
 propagation effects, in 10 sectors direct taxes increased but output and profits did not fall.
 The reason is that their costs were reduced as a result of lower taxes on their suppliers
 and/or increased demand. Moreover, tax distortions were leading to a shorter and inefficient
 production chain as the reform significantly changed the linkage structure of the economy.

Ficha do documento

Tipo

Estudo

Ano

2023

Instituição

Escola de Pós-Graduação em Economia da FGV

Fonte

Repositório da FGV

Idioma

Inglês

Acesso

Não informado

Identificador

oai:repositorio.fgv.br:10438/33081

Palavras-chave

Tax distortionsInput-output linkagesShock propagationVAT dispersionInvestimentos - ImpostosImposto sobre o valor agregado - Dispersão