Abstract:

Over the recent decades largest national economies have used value added tax (VAT) within their consumption taxation systems more intensely, the sales tax being gradually phased out. In most countries of the world VAT provides for 12 to 30% of a national budget’s steady revenue. The article studies the impact of up to 20% increase of the standard value added tax rate in Russia from 2019 upon the taxpayer pricing policies. The study assumes the conditions of pure competition between the taxpayers who interact as follows: “manufacturer – wholesale trade – retail trade – end buyer." Marginal analysis of the mathematical model proved that whenever the ex-works prices change, the end consumer retail price increases by 2.5% after VAT rate is increased from 18% to 20%, provided that all the trade chain members retain their respective profits. If the purchasing power is limited and all chain members cannot afford raising the price, a 2% VAT rate increase will drive each chain member’s profitability down. However if the retailer applies a special tax regime, with each chain member retaining a fixed amount of the respective profit, retail prices will increase by at least 1.7%.