Financial VAT may improve trade openness

ABSTRACT

This paper theoretically and empirically analyzes how the taxation of financial services under VAT (‘financial VAT’) influences trade openness. The empirical analysis uses data from the OECD and 36 European Union countries for the period 1960–2019. Dynamic panel data techniques are used, concretely the GMM System, and an unbalanced panel is handled. The results corroborate that financial VAT, and in particular the ‘option-to-tax’ method applied by some countries in the European Union, are positively associated with a country’s trade openness.

KEYWORDS:

• Financial VAT
• financial services
• trade openness
• panel data

JEL CLASSIFICATION:

• H25
• H21
• E62
• F14

Acknowledgments

The authors acknowledge comments by a reviewer of the Journal, and the funding received from the Regional Government of Aragón and the European Regional Development Fund (project S23_20R).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are available from the corresponding author upon request. https://doi.org/10.7910/DVN/WEW6EU

Notes

¹ For a detailed review of the economic distortions of the exemption of financial services on VAT, see López-Laborda and Peña (2018). For a recent study on the implications of the exemption on real economy, see Baydur and Yilmaz (2021).

² For a more in-depth description and analysis of the different methods, see López-Laborda and Peña (2017b, 2018).

³ Indeed, as far as we know, the impact of financial VAT on any variable has not yet been studied with real data and econometric techniques, except for the impact of this tax on the size of the financial sector (López-Laborda and Peña 2017c) and on income distribution (López-Laborda and Peña 2017a).

⁴ Data from the Input-Output Table for basic prices from the Spanish National Institute for Statistics (INE 2015). Accessed on 23 April 2020.

⁵ If any data is zero in both fVAT and separate variables, it means that either the country exempted financial services from VAT that year, or the country was not taxing VAT at that time (e.g. US). In the case of France, where financial VAT and a separate tax were in force simultaneously for a while, we have considered it as financial VAT during that period.

⁶ Other location variables have been used, such as the mean distance to France, USA and Japan, but we obtained worse results in the estimates of the models.

⁷ Similar results have been obtained by estimating the same specifications using GMM in differences.

⁸ Specifications with other lag length have been estimated and the results are kept.

⁹ For a brief discussion of other measures of human capital which are debated in the literature, see Barro (2001). We have tried other variables, such as the literacy rate, but the resulting models do not have good econometric properties.

Additional information

Funding

This work was supported by the Universidad de Zaragoza [Grupo de Economía Pública].