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On the Effect of an Increase in the VAT on Electricity in Portugal

Pereira, Alfredo and Pereira, Rui (2017): On the Effect of an Increase in the VAT on Electricity in Portugal.

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Abstract

In this paper we analyze the budgetary, economic, distributional and environmental effects of a permanent increase in Portugal of the value added tax on electricity spending. The analysis in conducted in the context of a new multi-sector and multi-household dynamic general equilibrium model of the Portuguese economy. Simulation results suggest that a permanent increase in the VAT on electricity from 6% to 23% has positive budgetary and environmental effects but both come at the cost of detrimental economic and distributional effects. As economic performance in Portugal improves and the public budgetary situation becomes less constraining, it is inevitable that pressure will mount for this increase in the VAT rate on electricity to be reversed. This mixed bag of results provides an important element in this debate. Reverting to a VAT tax rate of 6% on electricity, would improve economic performance and have positive distributional effects. From this perspective such reversion would be desirable. The question is then whether or not the public budget can somehow compensate for the loss of revenues in a way that would not eliminate the positive economic and distributional effects of such reversion.

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