A Temporary VAT Cut in Three Acts: Announcement, Implementation, and Reversal

40 Pages Posted: 16 Apr 2024 Last revised: 6 May 2024

See all articles by Tiago Bernardino

Tiago Bernardino

Stockholm University - Institute for International Economic Studies (IIES)

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

João Nuno Quelhas

Bank of Portugal

Márcia Silva Pereira

Nova School of Business and Economics

Date Written: March 29, 2024

Abstract

We investigate the pass-through of a Value-Added Tax (VAT) decrease to consumer prices, using Portugal’s temporary cut in VAT for a subset of food items in 2023 as a laboratory. Exploiting a novel high-frequency dataset of online retail prices, we use an event study approach to analyze price dynamics across the complete policy lifetime. We find that prices rose by around 1% upon announcement, that the pass-through was almost complete when the policy was implemented, and that the pass-through was approximately 70% at the reversal of the policy. The price reduction was highly persistent over the entire duration of the policy. We estimate that the policy decreased month-on-month inflation by 0.7 percentage points. We find evidence of deflation in producer prices around the implementation, which could be a potential mechanism driving the high pass-through.

Keywords: Value-Added Tax, Pass-through, Public Policy, Inflation

JEL Classification: E31, H20, H22

Suggested Citation

Bernardino, Tiago and Gabriel, Ricardo Duque and Quelhas, João Nuno and Silva Pereira, Márcia, A Temporary VAT Cut in Three Acts: Announcement, Implementation, and Reversal (March 29, 2024). Available at SSRN: https://ssrn.com/abstract=4788047 or http://dx.doi.org/10.2139/ssrn.4788047

Tiago Bernardino

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.ricardoduquegabriel.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João Nuno Quelhas (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Márcia Silva Pereira

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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