following similar criteria adopted by new tendencies in public accounting relative to the concept “tax expenditure”, the methodology of measurement should also compute the area P0DFP1. This area is equivalent to levy a non-accounted Tax on Production of the tradable good, reducing the producer-price by the corresponding tax rate, destined to finance a non-accounted transfer to the domestic demand26.
It should be noticed that the price reduction for vendors, like also the one already seen in Case 4, means a fall in the amount of sector value added; but through the figure or the numerical example can’t be identified which component(s) of the value added is(are) affected. Following Stolper-Samuelson theorem on this analyses27 and modifying its assumptions to fit them more realistically to an scenario of economies like the one of Argentina – essentially assume an infinitive-price-elasticity supply of capital and fix or a relative rigid labor and land supply curves – incidence could be easily demonstrable. It will imply falls in salaries of workers with very low regional mobility and in land values due to the capitalization effect of the tax.
Now, if government introduces the VAT as it was already seen in Case 6, prices for vendors won’t be modified due to “zero-rate” treatment for exports. After VAT introduction, incidence of the tax that levies the domestic purchases will affect consumer’s prices. However, the government can modify this effect simply introducing a Tax on Exports with the same VAT rate; or can instead fix a quota to exports equivalent to the volume Q1Q2 in Figure Nº 4, allowing domestic demand to face the previous price P0. So VAT incidence on domestic demand can be compensated and shifted to the Agricultural Sector (the area P0DHP1) by the tax on exports. Figure Nº 6 shows these effects.
Figure Nº 6
Supply Price with VAT
Supply Price without VAT
Price with initial Tax on Exports Price with increased Tax on Exports
Demand with VAT Demand without VAT
26 The reduction of price due to tax on exports is equivalent to generate an additional cost in sector production that will reduce the economic surplus in proportion to the tax rate. The absence of “tax accounting” of this cost is more important that the traditional “tax expenditure” concept – that represent the amount of the tax revenue lost or not paid by a taxpayer and the consequent subsidy not accounted in the public budget “affecting to the same taxpayer”. In this case “tax is paid” and “subsidy is received” through the market mechanism by different economics agents. Who pays the tax is not the same agent that receives the subsidy. See Appendix for additional analytical explanations.
27 The theorem suggests that levying the price of a good with a capital-intensive technology of production, due to the assumption of fix factors supplies, the incidence of the tax burden will affect capital price (in case of an export good meaning all the tax burden because forward shifting possibility would be null).