Welfare effects of value-added tax harmonization in Europe

This book employs a computable general equilibrium framework to assess recent value-added tax reform proposals in the European Union from a welfare perspective. Following the 1985 "White Paper" on the internal European market, a vigorous debate emerged regarding tax barriers to free trade. The European Commission initially planned to eliminate both physical border controls and fiscal frontiers within the EU by January 1, 1993. This shift in value-added taxation aimed to replace the destination principle with the origin principle. Although some economists supported the origin principle for a unified European value-added tax system, the timing was not conducive for such a change. By December 1991, the ECOFIN Council could only agree on a transitional system that preserves the destination principle while transferring border tax procedures from national borders to firms. This transitional arrangement was set to expire on December 31, 1996, with a final decision on value-added taxation to be made by the ECOFIN Council by December 1995. If no decision is reached, the transitional measures will continue. The most probable outcome involves a shift to the origin principle, accompanied by a clearing mechanism to mitigate significant revenue shifts among member states.