Estimating VAT Pass Through

Abstract

This paper estimates the pass through of VAT changes to consumer prices, using a uniquedataset providing disaggregated, monthly data on prices and VAT rates for 17 Eurozonecountries over 1999-2013. Pass through is much less than full on average, and differsmarkedly across types of VAT change. For changes in the standard rate, for instance, final passthrough is about 100 percent; for reduced rates it is significantly less, at around 30 percent;and for reclassifications it is essentially zero. We also find: differing dynamics of pass throughfor durables and non-durables; no significant difference in pass through between rateincreases and decreases; signs of non-monotonicity in the relationship between pass throughand the breadth of the consumption base affected; and indications of significant anticipationeffects together with some evidence of lagged effects in the two years around reform. Theresults are robust against endogeneity and attenuation bias.

Keywords: Tax incidence, Price effect, Pass through, consumption, prices, goods, elasticity, value, Incidence, Business Taxes and Subsidies,

JEL Classification: -;- E31, E31, H22, H22, H25, H25