Supply and Demand Determinants of Heterogeneous Vat Pass-Through

64 Pages Posted: 2 Sep 2022

See all articles by Alexander Copestake

Alexander Copestake

International Monetary Fund

Matthieu Bellon

International Monetary Fund (IMF)

Abstract

We investigate the substantial variation in the extent to which a rise in value-added tax (VAT) is passed on to consumers. We first extend existing theory to characterize the roles of imperfect competition and product differentiation, then investigate these relationships empirically using a panel of 14 Eurozone countries between 1999 and 2013. We find that consumers pay a larger share of VAT increases when producers face more competitive upstream markets: the higher tax reduces final demand, but this lower demand does not in turn reduce input prices when upstream markets are competitive. Greater scope for quality differentiation also increases pass-through, by reducing the relative price elasticity of demand.

Keywords: VAT, Price effect, Pass through, Competition, Product Differentiation

Suggested Citation

Copestake, Alexander and Bellon, Matthieu, Supply and Demand Determinants of Heterogeneous Vat Pass-Through. Available at SSRN: https://ssrn.com/abstract=4207882 or http://dx.doi.org/10.2139/ssrn.4207882

Alexander Copestake (Contact Author)

International Monetary Fund ( email )

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HOME PAGE: http://copestake.info

Matthieu Bellon

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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