131 Abstract This paper studies the impact of VAT upon the economic activity in Romania. By developing a new mathematical model we offer several dy- namic and efficient possibilities for observing the modifications caused by the temporary reduc- tion of taxes upon the personal incomes which suggest that the resulting additional incomes are often saved and less consumed. Analyzing several temporary reductions in incomes, the model describes also a scheme regarding the developments of economic growth. Based on this scheme, are revealed the different arrangements in which a present economic activity influences a future one. According to the proposed model, it is highlighted that the national income increases as a response to the aggregated demand. Keywords: aggregate demand, indirect tax, investments, inflation, output. VALUE ADDED TAX IMPACT ON ECONOMIC ACTIVITY: IMPORTANCE, IMPLICATION AND ASSESSMENT – THE ROMANIAN EXPERIENCE Mariana MUREȘAN Delia DAVID Ladislau ELEK Florin DUMITER Mariana MUREȘAN Professor PhD, Accounting Department, Faculty of Economics and Business Administration, Babeș-Bolyai University, Cluj Napoca, Romania Tel.:0040-740-162.140 E-mail: mmuresan52@yahoo.com Delia DAVID Associate Professor, Faculty of Economics, ‘Vasile Goldiș’ Western University of Arad, Arad, Romania Ladislau ELEK Lecturer PhD, Faculty of Economics, ‘Vasile Goldiș’ Western University of Arad, Arad, Romania Florin DUMITER Associate Professor PhD, Faculty of Economics, ‘Vasile Goldiș’ Western University of Arad, Arad, Romania Transylvanian Review of Administrative Sciences, Special Issue/2014, pp. 131-151 132 1. Introduction Fifty years ago, the Value Added Tax (VAT) was rarely heard outside of France and some specialized handbooks. Nowadays, it is found in over 130 countries where it commonly raises 20% or more of all tax revenues. Widely adopted in sub-Saharan Africa and elsewhere, it has been the centerpiece of the tax reform in many developing countries. By any standards, the rise of the VAT has been the most significant devel- opment in tax policy and administration of recent decades. Since the 1960s, VAT systems have been progressively adopted around the world. The majority of VAT regimes are characterized by a consumption tax base with mul- tiple tax rates, multiple exemptions, and the credit method of tax liability calculation. These VAT characteristics have been incorporated in a number of studies on the in- cidence and economic effects of VAT. However, three important VAT characteristics have yet to be formalized in applied VAT research: multi production, legislated dif- ferences in exemption status, and industry-specific differences in the refund ability of VAT paid on inputs to production and investment. The need for careful and detailed treatment of these VAT characteristics is particularly important in disaggregated gen- eral equilibrium models. These models are recognized as well suited for the analysis of the efficiency effects of tax policies. The modeling of VAT within a general equi- librium framework raises a fourth issue not yet addressed in the VAT modeling lit- erature. Even in highly disaggregated models, commodity and industrial definitions are, by necessity, aggregates of hundreds of commodities and industries, each with the possibility of distinct tax rates and exemptions under the relevant VAT statutes. Previous studies have assumed that a commodity is either exempt or taxed. Several decades ago, there have been numerous theoretical and empirical studies that attempted to investigate the relationship between taxation and economic perfor- mance and long-term economic growth. The theory of tax incidence or burden has been a central focus of public sector economics. There is a consensus that the analysis of tax incidence should be conducted within a general equilibrium framework. The theoretical tax incidence literature argues that if a tax affects the price of an accumulated factor of production (physical capital, human capital and technology) then this tax is distortionary. An increase in distortionary taxation discourages the economic activities and consequently lowers the growth rate of economic output. Recent papers on base broadening of the VAT have shown how traditional argu- ments in favor of a broadly based VAT at a low uniform rate can break down if there is an underground economy (Piggott and Whalley, 2001), household production with market provided inputs (Sandmo, 1990), labor (or all factors of production) is inter- nationally mobile (Lockwood et all., 2002), or other non-traditional elements appear. There are two the key challenges for tax design that face almost all developing countries. The first is that of dealing with a large informal sector. Hard to measure, but put by Schneider (2002) at an average of around 40% of the gross national income in these countries, informality represents both a costly narrowing of the tax base and a potentially serious distortion of economic activity. The impact which informal econ- 133 omy has on the tax policy design made the subject of research for many scientists among which, the most notable ones are Piggott and Whalley (2001), Stiglitz (2003), Munk (2008), Emran and Stiglitz (2005), and, taking a somewhat different perspective, Gordon and Li (2005). The second challenge is determining the proper degree of reliance on trade taxes. These still account for 20% or (often) more of all tax revenue in many developing countries, so that continuing pressures towards further trade liberalization, combined with pressing revenue needs, raise the question of how reduced trade tax revenue can be replaced from domestic sources (Keen, 2008). What is troubling here is the emerg- ing evidence which suggests that many low income countries (though by no means all) experienced difficulties in achieving such replacement in the past (Baunsgaard and Keen 2005). The effects of fiscal policy on economic growth have been the subject of long de- bates. With respect to short-term effects, a large body of empirical research, primarily for industrial countries, has been devoted to understanding under which conditions fiscal multipliers can be small (and even negative) (Alesina and Perotti, 1996; Alesina and Ardagna, 1998; Perotti, 1999). Perotti (1999), for example, shows that budgetary consolidations tend to be expan- sionary when debt is either high or it grows rapidly. Alesina et al. (1995) and Alesi- na and Ardagna (1998) find that, in addition to the size and persistence of the fiscal impulse, budget composition matters when it comes about differentiating all those private sectors which the fiscal policy is applicable to. Fiscal adjustments that rely primarily on cuts in transfers and the wage bill tend to last longer and can be expan- sionary, while those that rely primarily on tax increases and cuts in public investment tend to be constricted and unsustainable (Von Hagen and Strautch, 2001). The potential effects of fiscal policy on long-term growth have also generated sub- stantial attention (Tanzi and Zee, 1996). The most recent research studies in the field of endogenous growth suggest that the fiscal policy can either promote or retard both the economic growth and the investments in human and physical capital. The last ones can be affected by taxes while investments can influence the governmental ex- penditure. Hence, the fiscal policy can influence certain variables which the economic growth depends on (Chamley, 1986; Barro, 1990, 1991; King and Rebelo, 1990; Barro and Sala-i-Martin, 1995; Mendoza et al., 1997). Several empirical studies deal with the relationship between VAT and a multilev- el production leading to the conclusion that allowance efficiency effects depend on changes of activity across sectors with different rates of net indirect taxation (Giesecke and Nhi, 2010; De Mello, 2009; Lazarev and Pleshdinskii, 2007). Studies conducted by Christadl, Fetchenhauer and Hoezl (2011) examine the potential confirmation bias in price perception in consequence to a real-world event and different explanations for such a bias and suggesting that participants reported price increases that were signifi- cantly higher than the official price development and in line with an undifferentiated belief in market price increases. 134 Summarizing, the emergence of value added tax stays on the movement of goods. Switching to VAT has made it possible to avoid cumulative taxation of goods move- ment. It is a unique tax that it is perceived in a fractionated way, corresponding to the added value for each stage of the economical circuit. 2. The VAT evolution and its impact upon the economic activity in Romania In developing countries, especially in the case of Romania, the studies on the VAT emphasize the importance of the conditions under which a VAT is fully optimal (even though it is a tax on the informal sector of production which is restrictive): an efficient tax structure requires the development of both the VAT and the withholding taxes (Pantazi and Străoanu, 2011; Keen, 2008; Zee, 2008). The VAT was brought in Romania in 1993, its introduction being based on the following considerations: a) there was a need to replace the former tax applied on the commodity flow, and b) the purpose was to increase the resources of the state and to comply with the tax systems existing in the rest of the European countries. At the beginning, the flat tax was 18%. Later, the VAT system has undergone mul- tiple rearrangements both from the point of view of the taxable operations and the tax subjects as well as from the point of view of the rates. In regards to the VAT regime change, we can mention that initially there were two rates, 18% and 9%, which were later increased to 22% and 11%. Then, the 19% flat rate was introduced; at the moment its value is 24%. According to the existent Tax Code from 2014, the standard VAT rate in Romania is 24% and it applies to the taxation base of those taxable transactions that are not ex- empted or not subject for the rate reduction. The reduced rate is 9% and it applies to the taxation base of the following services and/or commodities: • Services as granting access to castles, museums, memorial houses, historical mon- uments, etc.; • Delivery of textbooks, books, newspapers and magazines, excepting those in- tended exclusively or primary for advertising; • Delivery of prostheses and accessories of such, excepting the dental ones; • Delivery of orthopedic products; • Delivery of drugs for human or veterinary use; • Accommodation in the hotel sector, including the rental lands for camping; and • The delivery of the following goods (valid starting with the 1st of September, 2013): – All bread types as well as the following bakery varieties: baguettes, mini ba- guettes, mini bread and braided bakery; – White wheat flour, semi-white wheat flour, dark wheat flour and rye flour; and – Triticum spelta, common wheat. Starting from 2013, the VAT applicable to the basic agro-food products was re- duced from 24% to 9%. This measure was taken even in other EU member states, such 135 as Belgium and Germany, and it was meant to ensure the required social protection and the increase of the collection rate for the state budget. Also, there is a reduced rate of 5% applicable to the taxation base for the delivery of houses as part of the social policy, including the land on which the houses are built. Regarding the impact of VAT on the economic activity from Romania, we can as- sess that Romania data are striking. In 1999, Romania had the lowest effective tax report/tax formal throughout the region. The low income could be explained by the fact that firms were granted exemption from payment, arrears accumulations which were removed from tax obligations (not necessarily evasion). Because in Romania normalized tax returns are the lowest in the region, we believe that poor collection and exemptions from tax are the key features in explaining the poor fiscal perfor- mance recorded. In Romania, in the same way as in other developing countries, the level of VAT has an important role in terms of economic growth. Therefore, it is required for any action regarding the application of a lower or a higher VAT rate to be done by taking into account especially the economic situation of Romania. At the same time, a high VAT rate limits the possibility of consumption and in- vestment, and it generates negative effects on the supply and the demand of economic goods produced by economic agents. The increment of the value-added tax has nega- tive effects on inflation by increasing it and it has a series of inconvenient consequenc- es on the economy. In the context of the economic and financial problems that Romania is confronted with it would be appropriate to introduce differentiated VAT rates. The application of differentiated VAT rates for ordinary commodities and luxury goods would help disadvantaged people during the crisis by removing the damage and the consump- tion failure. In this sense, we propose a mathematical model capable of supporting the state- ments above. The objectives of the research are to look particularly at the following paths: • Positioning the VAT in Romania; • Presentation of the principles and rules governing the organization of VAT in Romania; and • Formulation of possible solutions to increase efficiency in Romanian and in other European economies based on VAT. Regarding the research methodology, the inductive method was used. We con- ducted a qualitative research based on observation of some aspects, and also a quanti- tative one. The main method used for collecting both the data and the historical pieces of information was the observation (the spontaneous and the provoked types). This method applies to the research subject, which in this case is the Romanian VAT rate, and it is used with the purpose of exposing the evolution of this type of indirect taxa- tion. Information was extracted from reports. 136 Inductive research is a flexible approach because there is no requirement of pre-de- termined theory to collect data and information. The researcher uses observed data and facts to reach a tentative hypothesis and to define a theory regarding the research problem. This helps the research to give inductive arguments (Mertens, 2009). The proposed methodology which was used has several stages: theoretical foun- dations of the study, selection of the case studies, conducting exploratory semi-struc- tured interviews, analysis of results, achieving scripting support, and presenting the results. For an efficient symbiosis, in our study we used several research papers and arti- cles with a direct impact on our study, especially regarding: • Knowledge and interpretation of reality in the concerned field; • Information of management, citizens and the financial authorities regarding the economic and the financial condition, performance achieved, and the efficiency of resource valorization; • Identification of new sources of competitive advantage; • Foundation of the measures to reduce or improve performance; and • Foundation of the development strategies in a dynamic competitive environment. In the present study it was considered as a major objective to ensure the viability under domestic and international competition within the restrictions imposed by fis- cal policy. In our opinion, it was important to present and analyze the way in which differentiated VAT has a positive impact over Romanian economy. In the relationship between supply and demand, although the first analysis would have the decisive role offer, especially in the developed market economy conditions, application itself, since its knowledge, influence offer guiding and stimulating, ne- glecting the changes in volume, quality and structure of demand, caused by joint ac- tion of various factors. In the following chapter we will use a mathematical optimiza- tion for the economic adjustment. 3. Mathematical optimization for the economic adjustment – comparative study 3.1. Description of the economic control model In this article we present a variant of the Philips multiplication-accelerator. In this model, the command parameter is represented by the budgetary expenditures which need to be chosen in order to attain a desired level of the Gross National Product (GNP). The model is leading, ultimately, to the problem of quadratic functional linear regulator. Using the known results it is precisely analyzed the stability of the optimal trajectories. The notations will be as following: )(tG - the budgetary expenditure at the t moment, )(tZ - the exports at the t moment, )(tM - the imports at the t moment, )(tC - the consumption at the t moment, and )(tI - the investments at the t moment. 137 There is a necessary Gross National Product (demand) )( ntY correspondent to each choice of the budgetary expenditure )(tG expressed by the following equation: )()()()()()( tItCtMtZtGtYn  (1) The )(tY represents the GNP achieved effectively at the t moment. In general, )(tYn and )(tY quantities are not equal. The evolution of the system is described by the equations: (2), (3), (4), (5), (6) ( ) ( ), ( ) ( ( ) ( )), ( ) (1 ) ( ), ( ) ( ), ( ) ( ) ( ) ( ), n n Y t I t I t Y t Y t C t s Y t Z t zY t M t mY t Y t Y t            Where 0,0,10,0,0  mzs are constant. The equation (2) expresses the fact that the entrance of the )(tI in the system is proportional with the )(tY output variation speed. In the control theory, such an equation has the generic name of ‘accel- eration equation’. The v acceleration coefficient represents the investment necessary quantity for GNP’s growth by a unit. The multiplier equation (3) shows that the investment is proportional with the excess between the necessary GNP and the achieved one. It can be assumed that both consumption and exports represent constant shares from the achieved GNP. Finally, the imports are a constant fraction from the realized GNP plus the excess between the necessary GNP and the achieved one. By removing ( ), ( ), ( ), ( ), ( )nY t Z t M t C t I t from the (1) – (6) equations the equation ob- tained will be the following: ( ) ( ) ( )Y t Y t G t  (7) Where: , )2( )(       v smz (8) 2, )2(        v (9) Knowing that the initial value )0(Y = 0Y of the achieved gross national product, at the t = 0 moment, there is a )(tY unique solution of the equation (7) corresponding to any )(tG , 0t choice for the budgetary expenditures. 0* G is a random constant value attribute to the budgetary spending. We will name a equilibrium solution (correspondent for the * G value) of the (1) - (9) equations a solution of it in which all the functions ( ), ( ), ( ), ( ), ( ), ( ), ( )nY t T t Z t M t C t I t G t are con- stant, * )( GtG  , and the necessary GNP is equal to the achieved GNP: )(tYn = )(tY . 138 Hence, in order for the constant sizes ******* G ,I ,C,M ,Z ,YYn  to represent a neces- sary equilibrium solution, the following equations must be checked: .***,**,)1(* ,0* *,***** YmMYzZYsC I GCMZGY    By solving this system according to *G , the results are the following: .0**,* *,**, )1( *, * *           IG mzs m M G mzs z ZG mzs s C mzs G Y (10) Let it be: *,)()(*,)()(*,)()( *,)()(*,)()(*,)()(*,)()( ItItICtCtCMtMtM ZtZtZGtGtGYtYtYYtYtY nn   The deviation of ( ), ( ), ( ), ( ), ( ), ( ), ( )nY t Y t G t Z t M t C t I t from their equilibrium state. It is easy to notice that these deviations satisfy the equations: ( ) ( ) ( ) ( ) ( ) ( ), ( ) (1 ) ( ), ( ) ( ), ( ) ( ), ( ) ( ( ) ( )), ( ) ( ) ( ) ( ). n n n Y t G t Z t M t C t I t C t s Y t vY t I t Z t zY t I t Y t Y t M t mY t Y t Y t                As well as previously, the following differential equation results from the elimina- tion of the ( ), ( ), ( ), ( ), ( ),nY t Z t M t C t I t : ( ) ( ) ( ),Y t Y t G t   (11) Where  and  are given by equations (8) and (9). We note by D(t), the exterior commerce balance (in deviation terms) accumulated till the t moment: 0 ( ) [ ( ) ( )] (0). t D t M Z d D     It is obvious that D(t) = M(t) – Y(t). The results are the following, by expressing the M(t) and Z(t) according to Y(t) and G(t): ( ) ( ) ( ),D t Y t G t   (12) 139 Where: ( )(1 ) 1 , . 2 m z s z             (13) The (11) and (12) equations describe the dynamic of the system. Considering G(t) the command function and assuming that the initial values of the status variables are known, the minimization for both the global quadratic deviation and command over the  ,0 interval are mandatory. In other words, the problem is considered the following: Let’s minimize: 2 2 2 1 20 ( ) ( ) ( )lY t l D t G t dt      (14) By the restrictions: 0 0 ( ) ( ) ( ), ( ) ( ) ( ), (0) , (0) , Y t Y t G t D t Y t G t Y Y D D           Where the constant negative weights are 0,0 21  ll Using the notations: , 0 0 ,, )( )( )(,, 0 0 2 1 0 0 0                                l l Q D Y x tD tY txBA     The problem (14) can be written as the following: Minimize: 0 ( ), ( ) ( ), ( )Qx t x t u t u t dt     With the restrictions: 0( ) ( ) ( ), (0) .x t Ax t Bu t x x   (15) 3.2. The study on the optimal solution The problem is considered the following: Minimize: 0 ( ), ( ) ( ), ( )Qx t x t Ru t u t dt     Having the following restrictions: ( ) ( ) ( ), (0) ,ox t Ax t Bu t x x   Where x(t) and u(t) are the dimension vectors n, respectively r, the A,B,Q,R ma- trixes are the type of Qrrnrrnnn ,,,,  is defined as the negative symmetric, R 140 is defined as positive symmetric. It is shown that if this problem satisfy the so-called ‘stability condition’, then the optimal command is obtained by the following synthesis form: 1 0 ( ) , Tu x R B Kx  (16) Where the K matrix is a algebraically Riccati equation solution: 1 0T TKA A K KBR B K Q    (17) In other words, the optimal status is the solution of the problem: 1 0( ) ( ) ( ), (0) Tx t A BR B K x t x x   (18) At the same time, it is noticeable the fact that a sufficient condition for stability is provided by the demand for the (A, B) matrix to be controllable: 1( , ,..., )nrang B AB A B n  (19) The Q symmetric matrix can be written as Q = HTH, where the H matrix is the max- imum rank. It was proved that apart from the (19) condition of controllability of the (A, B) pair, the controllability pair condition (AT, HT) is satisfied as well: nHAHAHrang TnTTTT  ))(,...,,( 1 (20) The Riccati algebraic equation (17) admits a K > 0 solution and the optimal status is stabilized: 0)( tx when t . We will apply these results to the problem (15). Thereby: ,, 0 0                  BA The following will be obtained: ( , ) .B AB            The controllability condition of the (B, AB) = 2 ranks is satisfied only and only if: .  (21) If according to the expressions (8), (9), (13) ( ) ( )(1 ) 1 , , , , 2, (2 ) (2 ) 2 z m s m z s v v z                           Hence, (21) will be written as: 2 2 ( ) ( )(1 ) . (2 ) (2 ) z m s m z s v v               141 We get: 2 ( 2)( ) 0,z m     And the controllability condition turns out into: .mz  (22) We will consider, as until now, that the equation (22) has been verified. Further on, we will discuss the controllability condition satisfaction (19) in relation with the l1 and l2 coefficients from the (14) performance function problem and we will describe the optimal solution behavior. Case (a). l1 > 0 and l2 >0. Matrix        2 1 0 0 l l Q Admits the decomposition Q = HTH, where: . 0 0 2 1          l l H It results the following:          000 0 ),( 2 211 l lll HAH TTT  . As l1, l2  0, the (H T, AT HT) matrix rank is equal to 2 and the condition (20) the op- timal status of our problem is the solution for the problem: 0( ) ( ) ( ), (0) Tx t A BB K x t x x   (23) Where K matrix verifies the Ricatti algebraic equation: 0T TKA A K KBB K Q    (24) Moreover, the optimal status is stabilizing: 0)( tx when .t But *,)()(, )( )( )( YtYtY tD tY tx        So that: 0)(*,)(  tDYtY when .t (25) The (b) case where l1 = 0 and l2 >0. (Function Y(t) does not interfere in the perfor- mance index). In this situation: . 000 000 ),( 2 2          l l HAH TTT  142 The rank(HT, ATHT) = 2 controllability condition is satisfied if and only if .0 In this case, the optimal situation is given by the same equations (23), (24) stabilizes. The (c) case where l1 > 0 and l2 = 0. (Function D (t) does not interfere in the perfor- mance index). In this situation: . 0000 00 ),( 11          ll HAH TTT  It results that: The (HT, ATHT) rank = 1 So, the condition (20) is not verified. We will show that an optimal status of the problem (15) – which doesn’t stabilize – can be built. In this purpose, we are looking for a solution of the Riccati algebraic equation (24) as the following: . 00 0        k K Taking into account the shape of the A, B and Q matrix, the (24) algebraic equation is explicitly written as the following:   . 00 00 00 0 00 0 00 0 00 0 000 0 00 0 1                                                       lkkkk      Performing the calculations from the left side of the matrix equation, it is found that:              00 00 00 02 1 22 lkk  . So k is the root of the equation: .02 1 22  lkk  As it follows: 2 1 22   l k   or 2 1 22   l k   . The optimal status is the solution for the problem: 0( ) ( ) ( ), (0) Tx t A BB K x t x x   I.e.: 2 0 0 ( ) ( )0 , (0) , (0) . ( ) ( )0 Y t Y tk Y Y D D D t D tk                      143 It will be obtained: 2 2 ( ) 0 ( ) 0 0 02 2 ( ) , ( ) . k t k t Y t Y e k k D t Y e D Y k k                      For 2 1 22   l k   It results: .01 222  lk  So 0 02( ) 0, ( ) k Y t D t D Y k          when .t For 2 1 22   l k   It results: .01 222  lk  So: ( )Y t   (after as 0,0 00  YY ), ( )D t   (after as 0 02 20, 0 k k Y Y k k               ) When .t The equations and/or inequality which form the model represent in fact the sys- tem, but at the same time the problem which has to be resolved. Hence, we can notice that this representation manner offers a decision model. 4. The impact of the VAT quota share at micro-level according to the multiplier-accelerator model at economic level The public authorities use fiscal policy for granting finalities vis-á-vis of influencing the economical process, adjusting the business cycle, and removing the economic im- balances. In this context, it is important to assess the main objectives of the fiscal pol- icy throughout the following model which will improve the correlation between the VAT and the economic activity, namely: economic stabilization, cyclical adjustment and economy recovery, economic restructuring and economic growth. 144 In this model, the command parameter is represented by the budgetary expendi- ture which decreases together with the diminishment of the VAT for food products, this decrease must be cancelled by the increase of the GNP. To each choice of G (t) budgetary expenditure there is a necessary level of Y (t) GNP which corresponds to it and it is expressed by the following equation: Y (t) = G (t) + Z (t) – M (t) + C (t) + I (t); Where: Y (t) – the GNP at the ‘t’ moment; G (t) – budgetary expenditure at ‘t’ moment; Z (t) – exports at ‘t’ moment; M (t) – imports at ‘t’ moment; C (t) – consumption at the ‘t’ moment; I (t) – investments at the ‘t’ moment We assume that both the imports and exports are constant. The analysis of the VAT percent regarding food products in the Romanian eco- nomic context has been made in accordance with the Philips’ accelerator-multiplier model. The modern theories on the consumption function combine the two hypotheses and in the consumption income theory function the factors analysis which determine the income expectations is included, analysis offered by the theory of the permanent income. A simplified version of such a consumption function is as it follows: C = a x A + b x j x YD + b x (1-j) x YD-1 Where: YD – is the available work income. It illustrates the role of wealth which has a great influence on the consumption expenses. The equation can approximate pretty accurately the consumption and it is the expression of permanent income estimation implied by it. Both theories explain better the total consumption behavior, although there are still several debating aspects as: the excessive sensibility of consumption regarding the current income. In the case the consumers’ expectations are rational, then their projections regard- ing the permanent incomes must be in compliance with the way the income varies in reality. An increase in the current income cannot be appreciated automatically – it is a long-run process. But by relying on the past experience, it can predict the future. For example, in previous periods an increase of 1 monetary unit is equivalent to 0.25 monetary units of permanent increase and the rest is a temporary gain. J’s dimension represents the proportion in which the current income transforms into permanent income and it is determined on the study of income evolution from the previous period, based on the following consumption function: C = c/ x YP 145 Taking into account also the relationships between the current and permanent in- come, the current income consumption inclination is obtained and it’s equal to c/ x j, measure acquired by the combination of the two theories. In the following section, we will assess the dependence between the demand elas- ticity, the supply elasticity and the tax repercussions – this will contribute to the com- prehension of the taxation pressures problems. Figure 1: The effects of the indirect taxes settlement Source: By authors At the settlement of a specific tax or subvention upon a good (which hasn’t been taxed) there is a movement of the supply curve to the left side in an appropriate man- ner; the assessment of a subvention determines the movement of supply curve to the right side. The specific evolution of the demand and supply curves generates balanced inter- sections which aren’t anything else but the price values. The separate analysis of the indirect tax assessments or the subvention upon prices implies the decryption of their influence upon the distribution of these effects between producer and consumer and the coordination by the state as the institutor and leading entity. The following quotations will be used: T = the indirect tax; O = the supply curve; Q = the production; P = the price; and C = the demand curve. According to the demand curve C0, the application of the T indirect tax upon a product will determine a movement in the upward part of the supply curve from the level O0 to O1 due to the price increase from P0 to P1, which corresponds to a lower de- mand. In consequence, the quantity and equilibrium price before (Q0 P0) and after the 146 tax settlement (Q1 P1) will be identified, due to the intersection of the demand curve with the supply curve. From the analysis of the generated effects, the following can be noticed: a. a) P1 > P0; Q1 > Q0; b. The government, through the estimated T indirect tax, will obtain an income equal with the hatched surface (Q1*T); c. The assessment of an indirect tax supposed a reallocation of resources. In this respect, in the processed commodity industry on which the tax is settled, a reduction of production takes place from Q0 to Q1 and the available resources are re- directed. The shaded area represents the equivalent freedom from the variable factors to the tax settlement. The more the inelastic is the offer the smaller will be the grey surface. Figure 2: The effects of the subsidies granted by the state Source: By authors Due to granting the S subvention by the government, the supply curve will get down and the effects will be opposite from the previous situation. From the analysis of the generated effects, the following can be noticed: a. P1Q0; b. The government bears the production growth program cost equal to the hatched area (Q1 * S); c. For producing the additional quantity from Q0 to Q1, the subvention beneficiary units will attract the variable producing factors which have the equivalent illus- trated by the grey surface. Using the demand and supply concept, we determined graphically the changes in the supply and demand elasticity and we represented the different proportions in the tax burden distribution regarding the tax on the business figure. With the purpose of simplifying the next analysis the demand curve segments is represented by some linear lines. The supply curve is represented by S and St and the demand curve by DQ. 147 The demand curve equation will have the following form, taking into account the corresponding sales and the volume of the prices: 12 2121 12 12 *** QQ PQQP Q QQ PP P tt       (26) Where: Q2 and Q1 – the sales amounts; P2 and P1 – the correspondent prices. a) taxes and elastical demand b) taxes and inelastical demand c) taxes and elastical demand d) taxes and inelastical demand Figure 3: Interdependence between taxation and the demand/supply elasticity Source: By the authors The elasticity of the demand is determined by the demand curve’s position on the Q*P surface, namely after the respective curve angle over the Q axis. Because the (26) angle inclination is characterized by the k tangent, for the D curve from the a) and b) 148 figures, it will be equal to: 0 12 12     QQ PP k t Because: 012  tPP and 012 QQ or tPP 12  and 12 QQ  . If -11) as it is presented in Figure 3, the price will increase insignificantly (from P1 until P2) and the preponderant part of the tax will be borne by the sellers. 5. Conclusions In this article we addressed an economic and mathematical model regarding eco- nomic adjustment to determine the optimal solution and to highlight the impact of the VAT percentage change on the multiplier-accelerator at economic level. VAT has replaced the traditional taxes in the quasi-totality of countries, and it is regarded as ‘neutral’ compared to turnover taxes. In particular, it does not incite to 149 vertical business integration of companies, and has a special plan to promote eco- nomic competition. Between pure model of VAT and tax regulations under that name differences occur. In the first place, regarding VAT rate – in fact, particularly across Europe – there are three types of allowances: ‘normal’, ‘low’ and ‘zero’. Zero rate is for goods and exported services from abroad, on the basis of destination – the exported good is taxed in the country in which is consumed. In the second place, there are the exceptions to the trend over the years to generalize VAT for all goods and services. Such exceptions concern certain operations (financial), certain categories of legal per- sons (Government, universities) or businesses that do not exceed a certain threshold of turnover. Of concrete rules VAT, depending on the elasticity of supply and de- mand, can reach that part of the tax burden which is not passed on the consumers. The assessment of VAT tax incidence reduces to the analysis: at first, VAT is tan- tamount to a tax levied only on a bestselling retail stage when we are interested in the effects of the changes in the rate applied to an object; second, incidence of a tax in general balance when we are interested in the effects of simultaneous changes in VAT for all goods and services. The Romanian households assign a disposable income which is established in the aftermath of fees reduction (especially taxes), either for the current consumption, or for the satisfaction of future consumption needs. According to the consumption pe- culiar expenditures distribution legislation, gaining maximum satisfaction levels is the equal utilities conditions of each group of consumed goods from each expendi- tures category designated to consumption. 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