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Case 4: Agricultural Sector production sold to domestic market only, facing demand and supply normal curves (price-elasticity negative and positive, respectively)

[1a]

[1a]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

102

93

31+6

62

6

10

6

4+1

8%

200

182

93

89

9

18

10

8

9%

230

209

182

27

3

21

18

3

11%

178

18

49

34

16

TB=16/178

TB

= 9%

STAGE

STAGE I: Land labors

AGRICULTURAL SECTOR (CORN AND MEAT)

Note: decimals are omitted except in TB; little differences are due to calculus simplifications.

STAGE II: Harvest labors and Cattle feeding

STAGE III: Trading

Final Result

TB=18/178= = 10%

PV

VAT inc VAT exc

IC

VA

T (Addition VAT)

Invoice System

Liabilty

F. Crédit T (Net)

3) VAT: Agricultural Sector production sold totally and partially abroad, with Tax on Exports

When the case o tradable goods (more specifically exportable goods) is considered, it is possible to understand the more real scenario for analyzing tax burden measurement and tax incidence when VAT levies the production of goods and at the same time exports of those goods are levied by a Tax on Exports. In this case it is necessary to introduce the assumption of infinitive price-elasticity of demand, the usual assumption for small countries

  • price takers – that will be the relevant demand to determining the domestic supply level.

In order to organize with certain systematization the logic of this more complex and real scenario, two cases will be analyzed. First, Case 5: Agricultural Sector production destined totally to exports with border adjustment (VAT rebate for exports or “zero-tax rate” treatment). Second, Case 6: Agricultural Sector production destined partially to exports with border adjustment, which is the more relevant scenario for the Agricultural Sector.23 Figure Nº 3 describes Case 5.

In case of VAT levying exports, without border adjustment, clearly the Agricultural Sector would support the total tax burden indicated by the rectangle P0CBP1, together with the excess burden indicated by the triangle ABC, since the effective net price for the sector would be P1. This is due to the fact that price P0 implies the infinitive elastic demand

23 Border adjustment for exports (VAT rebate) is the modality of “Destination-VAT”, which is the VAT modality adopted by most countries, compatible with WTO agreement.

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