Abstract

In practice the government is exempted from value added tax (VAT). Thus VAT is regarded as having a smaller base than an exemption-free proportional income tax. It is proved that for a competitive closed economy regardless of the exemption of the government sector a switch from one tax to the other will require the same tax rate to finance a given government expenditure. The decline in government revenues in the VAT case is exactly matched by a decline in government expenditure, while in the private sector real income, production and consumption pattern will not be affected.

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