How to handle value-added taxes in cost-benefit analyses

Time: 2011, Thursday June 9, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Peter Zwaneveld (CPB)

Discussants: Bert Hof (Ministry of Finance, bureau beleidsonderzoek)

Language: Dutch

Registration:  Please register by sending an email to polinars@cpb.nl.

Abstract subject: It should not matter in which currency or accounting prices the effects of certain projects in a cost-benefit analysis are measured. Consistency requires that all effects are measured in the same price. Examples of different accounting prices are guilders and euro, but also market price including value-added taxes and factor costs. However, in current Dutch cost-benefit analyses different prices are used for different effects. In practice, investment costs are measures in market prices excluding value-added taxes. This is due to the intuitive but incorrect argument that value-added taxes are a monetary transfer with no national welfare implications. This leads to an inconsistency due to which the economic rate of return of a substantial amount of projects is being over-estimated. Preferably, all effects should be measured in market prices including value-added taxes. The value added taxes of investments should not be seen as a value-transfer, but should be seen as compensation for foregone income for the government due to additional taxation to finance the project. Finally, we provide practical suggestions to consistently measure all project effects in market prices including value -added taxes.

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