Investment Rating - The report does not explicitly provide an investment rating for the industry under discussion Core Insights - The value-added tax (VAT) is an effective revenue tool for both developed and developing countries, with 175 countries implementing it as of 2024 [7] - VAT exemptions can lead to increased production costs as they deny input tax credits, resulting in VAT being embedded in the prices of goods and services [2][7] - The paper develops a VAT model using data from 29 European countries to analyze the effects of VAT exemptions on final prices and their overall effectiveness [2][7] - Exemptions are often used for pragmatic reasons, such as reducing compliance costs for small businesses and addressing specific policy goals, but they can have negative consequences that undermine their effectiveness [8][21] Summary by Sections Introduction - The VAT's design allows businesses to charge VAT on sales while claiming credits for VAT paid on purchases, ensuring it acts as a tax on final consumption [7] - Exemptions disrupt this process by increasing production costs and embedding VAT in prices, which has not been extensively quantified in previous research [7][8] Methodology - The model is based on input-output tables for 29 European countries, capturing supply and use relationships among 45 commodities [12][24] - The model allows for the introduction and removal of exemptions, capturing the direct, embedded, and cascaded VAT effects [13][14] Simulation Results - The simulation results indicate that effective VAT rates on exempted commodities are always below the baseline VAT rate of 10% but above zero due to embedded VAT [19][64] - The degree of embedded VAT varies significantly across commodities, with some exemptions leading to higher effective tax rates on final consumption than the standard VAT rate [65][66] - The report concludes that exemptions are an inferior policy tool compared to reduced VAT rates and should be limited to addressing specific pragmatic concerns [21][22]