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What was actually cut in the barbers' VAT cut?

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  • Kosonen, Tuomas

Abstract

The tax incidence of consumption taxes across various sectors of the economy is a key aspect when designing a tax structure. However, there are very few empirical findings on this subject. This paper studies the tax incidence of consumption taxes utilising a VAT reform targeted at labour-intensive services in Finland. The reform creates a natural experiment set-up, because the reduced VAT was targeted at hairdressers, whereas the normal tax treatment still applied to beauty salons. This experiment is exogenous to the economic conditions of hairdressers in Finland, since this group was selected in a European Commission Directive. I study the effects of the reform on prices and demand. The results suggest that barbers cut their prices only by half of what complete pass-through would have implied. Using the experiment as an instrument, I find little effect on demand. Thus, there does not seem to be any indication of a significant effect on labour demand.

Suggested Citation

  • Kosonen, Tuomas, 2010. "What was actually cut in the barbers' VAT cut?," Working Papers 18, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:18
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    File URL: https://www.doria.fi/handle/10024/148757
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    Cited by:

    1. Jouko Kinnunen & Timo Rauhanen & Juha Honkatukia, 2011. "Effects of past and new VAT reforms in Finland," EcoMod2011 3412, EcoMod.
    2. Harju Jarkko, 2014. "Policy evaluation methods in tax research – new evidence and interpretations," Nordic Tax Journal, Sciendo, vol. 2014(1), pages 76-92, May.
    3. Eerola, Essi & Lyytikäinen, Teemu, 2015. "On the role of public price information in housing markets," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 74-84.
    4. Jukka Pirttilä & Hakan Selin, 2011. "Tax Policy and Employment: How Does the Swedish System Fare?," CESifo Working Paper Series 3355, CESifo.

    More about this item

    Keywords

    Consumption tax incidence; VAT; labour intensive services; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot;
    All these keywords.

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