The Full, Persistent, and Symmetric Pass-Through of a Temporary VAT Cut

Abstract

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices. Exploiting a novel dataset of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We provide evidence for two mechanisms driving this result; the policy’s salience to consumers in a high inflation environment and the decline of producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.

Publication
Revise and Resubmit at the Journal of Public Economics