International VAT harmonization : economic effects

Macroeconomic issues pertinent to the international and domestic effects of international VAT harmonization are highlighted, and VAT harmonization policies envisaged for Europe in 1992 are outlined. An intertemporal model is developed to analyze the incentive effects of various tax policies and their welfare implications. Dynamic simulations reveal that the macroeconomic and welfare implications of VAT harmonization depend critically on the tax system and the degree of substitution governing temporal and intertemporal allocations of savings, investment, and labor. The simulations also reveal a potential for significant conflicts of interest within each country and between countries.