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Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France
Abstract: This paper evaluates the incidence of a large cut in value-added taxes (VATs) for French sit-down restaurants in 2009. In contrast to previous studies, which only focus on the price effects of VAT reforms, we estimate the effects of the VAT cut on four groups: workers, firm owners, consumers, and suppliers of material goods. Using a difference-in-differences strategy on firm-level data, we find that: firm owners pocketed more than 55 percent of the VAT cut; consumers, sellers of material goods, and employees shared the remaining windfall with consumers benefiting the least; and the employment effects were limited.
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Citation: Benzarti, Youssef, and Dorian Carloni. “Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France.” American Economic Journal: Economic Policy 11, no. 1 (2019): 38–63. https://doi.org/10.1257/pol.20170504.
More and Cheaper Haircuts After VAT Cut? On the Efficiency and Incidence of Service Sector Consumption Taxes
Abstract: Consumption tax rates targeted at specific sectors are often reformed without any empirical knowledge about the efficiency of these policies. This paper sheds light on taxincidence as well as the efficiency issue, the potential for welfare improving reform, by studying the impact of value added taxes (VAT) on prices and quantities of labor intensive services. I utilize a VAT reform targeted at a specific service sector, which creates a natural experiment set up. The VAT for hairdressing services in Finland was reduced from 22% to 8%, and the previous tax treatment still applied to other labor intensive services. The choice of the treatment and control groups was exogenous to circumstances in Finland, since these groups were selected from a wider European setting. The results suggest that hairdressers cut their prices only by half of what a complete pass-through would have implied, and that there was hardly any adjustment in equilibrium quantity due to the reform. Hairdressers were able to increase their profits significantly. There is important heterogeneity in the results according to firm size.
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Citation: Kosonen, Tuomas. “More and Cheaper Haircuts after VAT Cut? On the Efficiency and Incidence of Service Sector Consumption Taxes.” Journal of Public Economics 131 (November 2015): 87–100. https://doi.org/10.1016/j.jpubeco.2015.09.006.
The Allure of the Value-Added Tax
Abstract: The VAT began life in the more developed countries of Europe and Latin America but, over the past 25 years, has been adopted by a vast number of developing and transition countries. A recent IMF study concludes that the VAT can be a good way to raise resources and modernize the overall tax system—but this requires that the tax be well designed and implemented.
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Citation: Ebrill, Liam, Michael Keen, Jean-Paul Bodin, and Victoria Summers. “The Allure of the Value-Added Tax.” Finance & Development, June 2002. https://www.imf.org/external/pubs/ft/fandd/2002/06/ebrill.htm.
Designing VAT Systems: Some Efficiency Considerations
Abstract: This paper undertakes a cross-country analysis of the determinants of VAT compliance, using data from a sample of 17 OECD countries for 1987. An index of compliance is constructed and regressed against variables which represent characteristics of the countries and their VAT rates. It is found that (a) a higher VAT rate is associated with lower compliance, and this tradeoff limits the revenue-maximizing VAT rate to under 25%; (b) compliance is substantially lower with multiple VAT rates; and (c) an extra dollar spent on administration raises revenue by $12, and longer experience with administering a VAT also raises compliance. Several OECD countries are ranged along a frontier, collecting about 8% of GDP through a VAT, but with rates of 14% to 22% on bases between 60% and 40% of GDP. For these, the base could only be broadened if the tax rate were lowered.
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Citation: Agha, Ali, and Jonathan Haughton. “Designing Vat Systems: Some Efficiency Considerations.” The Review of Economics and Statistics 78, no. 2 (1996): 303. https://doi.org/10.2307/2109932.