Working Paper: NBER ID: w23849
Authors: Youssef Benzarti; Dorian Carloni; Jarkko Harju; Tuomas Kosonen
Abstract: This paper shows that prices respond more to increases than to decreases in Value-Added Taxes (VATs). First, using two plausibly exogenous VAT changes, we show that prices respond twice as much to VAT increases than to VAT decreases. Second, we show that this asymmetry results in higher equilibrium profits and markups. Third, we find that firms operating with low profit margins are more likely to respond asymmetrically to the VAT changes than firms operating with high profit margins. Fourth, this asymmetry persists several years after the VAT changes take place. Fifth, using all VAT changes in the European Union from 1996 to 2015, we find similar levels of asymmetry.
Keywords: Value-Added Taxes; Asymmetric Pass-Through; Tax Incidence
JEL Codes: H20; H22; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VAT increase (H25) | price response (D41) |
| VAT decrease (H25) | price response (D41) |
| asymmetric VAT responses (H25) | higher equilibrium profits (D53) |
| VAT increase (H25) | lower profit reduction (D33) |
| low profit margins (L21) | asymmetric VAT responses (H25) |
| historical VAT changes (H25) | current prices (P22) |
| VAT changes in EU (H25) | similar asymmetries (F12) |