University of Lüneburg Working Paper Series in Economics 199
The exemption for Value Added Taxation (VAT) can be used to pursue distributive objectives. Goods like food, housing, medicine, or infrastructure services (water, telecommunication, postal) are very often partially or totally exempted from VAT. The exemption of infrastructure services had been frequently combined with market entry restrictions. Both instruments should assure the fulfilling of the universal service obligation (USO). VAT-exemption leads to two problems, at least: (i) the expectable financial gain, which can be achieved by the exempted firm, is unpredictable, and (ii) the welfare consequences depend on the prevailing type of market structure (competition, monopoly with or without price discrimination, or dominant firm). The VAT-exemption for German postal services can be seen as an outstanding case study to show the typical consequences. Because of empirical references for intensive use of price discrimination by Deutsche Post AG and strong arguments of Deutsche Post AG as a dominant firm welfare could be increased by abolishing VAT-exemption without abandoning USO.