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Does the value-added tax shift to consumption prices?

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  • Matti Virén

Abstract

This paper deals with the question of how consumption taxes, especially the value-added tax, affect consumption prices. The analyses are based on data from EU countries for the period 1970-2004. The starting point is a conventional supply-demand analysis of the tax incidence problem. This problem is solved using some simple price mark-up equations, Phillips curves and inflation forecast error equations. All these equations are estimated from panel data from EU countries using different estimators and variable specifications. In addition, an analysis is carried out with Finnish excise taxes using commodity/outlet level micro data for the period 1997-2004. A general result of all analyses is that about two thirds of a tax increase shifts to consumer prices. By contrast, there is less evidence on shifts to producer prices.

Suggested Citation

  • Matti Virén, 2009. "Does the value-added tax shift to consumption prices?," Working Papers 250, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    • Handle: RePEc:pst:wpaper:250
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    References listed on IDEAS

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    7. repec:zbw:bofrdp:2005_006 is not listed on IDEAS
    8. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, University Library of Munich, Germany.
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    Cited by:

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    2. Raymond Torres, 2012. "Shared Societies and the Global Crisis: Evidence and Policy," Working Papers 2012/42, Maastricht School of Management.
    3. Ván, Bálint & Oláh, Dániel, 2018. "Does VAT Cut Appear on the Menu? – The Consumer Price Impact of Hungarian VAT Decreases of 2016–2017," Public Finance Quarterly, Corvinus University of Budapest, vol. 63(3), pages 355-375.
    4. Caitlan Russell & Corne van Walbeek, 2016. "How does a change in the excise tax on beer impact beer retail prices in South Africa?," SALDRU Working Papers 162, Southern Africa Labour and Development Research Unit, University of Cape Town.
    5. Kahl, Mats Petter, 2024. "Was the German fuel discount passed on to consumers?," Energy Economics, Elsevier, vol. 138(C).
    6. Matti Viren, 2013. "Is the housing allowance shifted to rental prices?," Empirical Economics, Springer, vol. 44(3), pages 1497-1518, June.
    7. Caitlan Russell & Corne van Walbeek, 2016. "How does a Change in the Excise Tax on Beer Impact Beer Retail Prices in South Africa?," South African Journal of Economics, Economic Society of South Africa, vol. 84(4), pages 555-573, December.

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    More about this item

    Keywords

    Value-added tax; tax incidence; consumption taxes;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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