VAT Incidence, Tax on Exports and the Measurement of Tax Burden on Tradable Goods: the Agricultural Sector Case*
Horacio L. P. Piffano (Universidad Nacional de La Plata) March, 2007
This paper analyzes conceptual issues dealing with the measurement of “sector tax burden” (STB), specifically the methodological treatment of the Value Added Tax (VAT) and Tax on Exports, with particular reference to the Agricultural Sector. Through numerical examples, diagrams and the analytical Appendix will be possible to review conceptual definitions of tax impact (statutory or legal incidence), tax burden shifting and economic incidence of VAT; first, applied to domestic goods, and afterward considering the relevant case for the Agricultural Sector of commercial or tradable goods (commodities). Finally, the derivation of this analysis for the measurement of STB.
The review of the less common case for the Agricultural Sector of domestic (not tradable goods) is directed to readers not familiarized with the technical procedure of the Fiscal Credit or Invoice type of VAT - which is the VAT modality applied in most countries including Argentina – and to introduce them to the corresponding tax burden estimation. Afterwards, taking VAT and Tax on Exports jointly, the tradable goods case is analyzed, which is indeed the relevant case for the Agricultural Sector.
The main conclusion leading this conceptual review is to suggest the necessity of modifying the methodology of sector tax burden measurement as it is usually found in the technical literature applied to the Agricultural Sector, which is considered wrong or at least incomplete from the economic point of view.
1) VAT: The initial assumption of sales directed to the domestic market only, constant costs curve (supply with infinite price-elasticity) and normal downward demand curve (negative price-elasticity)
Tables and figures shown below give an easy example of how VAT works in the production chain, assuming two goods (corn and meat) and three production stages1. The three first examples have the usual assumption of forward tax burden shifting, as a consequence of supply and demand curve shapes mentioned in the title2. It is a special example to consider, because usually VAT is excluded from the calculus of the tax burden
The author acknowledges Porto and Di Gresia contributions for comments made on previous version of the
paper, while assuming all responsibility for what is written here.
1 The example is purely illustrative, designed only to understand the calculus; it is an extraordinary simplification of the Agricultural Sector reality, with arbitrary figures and omitting a great deal of inter- industrial relationships, including those belonging to different activities within the sector.
2 Additional simulations are presented later – corresponding to the consolidated Agricultural Sector– where such assumptions are modified.