VAT Pass-Through: The Case of a Large and Permanent Reduction in the Market for Menstrual Hygiene Products

Abstract

This paper examines the price effects of a VAT (value-added tax) reduction for
menstrual hygiene products in Germany. Several aspects make this VAT reduction
particularly interesting: The reduction is exogenous to economic conditions, the
reduction was substantial and permanent, and demand can be assumed to be
inelastic. We find that the VAT reduction was completely passed through to
consumers. In fact, pass-through rates of significantly more than 100 percent
can be observed. We find that the excess pass-through occurred in relatively
competitive market segments, and that it is almost fully explained by retailers
rounding down prices after the reduction.

Keywords: VAT reduction, pass-through, hygiene products, retailer competition, rounding effects

JEL Classification: H22, H25, H32, K34, L81