Welfare Analysis of VAT on Digital Products in South Korea

Welfare Analysis of VAT on Digital Products in South Korea | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Welfare Analysis of VAT on Digital Products in South Korea Seungyoon Lee, Byung-In Lim This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7403479/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This study empirically analyzes the welfare effects of Value Added Tax (VAT) on digital products in South Korea. Unlike previous research that predominantly employed qualitative methodologies, this study conducts a quantitative welfare analysis through estimating demand systems and calculating compensating variations using the Quadratic Almost Ideal Demand System with comprehensive panel data from the Korea Media Panel Survey (2011–2023). The empirical analysis reveals that VAT on digital products had a statistically significant impact on consumer welfare, though the magnitude was relatively modest, with compensating variation at the national level estimated at $7.788 per household monthly (0.146% of household income). This can be attributed to both the high price elasticity of demand for digital products (-7.219) and their relatively small share in household expenditure (0.2%). Notably, the analysis across income groups reveals that VAT on digital products shows a clear progressive pattern, with compensating variation increasing systematically from $1.503 (0.074% of income) for the lowest income quartile to $9.949 (0.174%) for the highest quartile. This contradicts the prevalent view that consumption taxes are inherently regressive, revealing VAT on digital products has distinctive welfare implications. These findings have policy implications: First, policymakers should carefully consider VAT rates for digital products given the high price elasticity of demand, as producers may bear substantial tax burden if supply elasticity is inelastic. Second, the progressive nature of VAT on digital products can contribute to distributional equity goals while expanding the tax base in the growing digital economy. JEL Codes: D6, D12, H22, H23, L86 Digital Products Value Added Tax (VAT) Welfare Analysis Quadratic Almost Ideal Demand System (QUAIDS) Korea Media Panel Survey (KMPS) Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. 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