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Does the Value-Added Tax Shift to Consumption Prices?

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    Abstract

    This paper deals with the question of how consumption taxes, especially the value-added tax, affect consumption prices. The analyses are based on data from EU countries for the period 1970–2004. The starting point is a conventional supply-demand analysis of the tax incidence problem. This problem is solved using some simple price mark-up equations, Phillips curves and inflation forecast error equations. All these equations are estimated from panel data from EU countries using different estimators and variable specifications. In addition, an analysis is carried out with Finnish excise taxes using commodity/outlet level micro data for the early 2000s. A general result of all analyses is that more than one half of a tax increase shifts to consumer prices. By contrast, there is less evidence on shifts to producer prices.

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    Bibliographic Info

    Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal AUCO Czech Economic Review.

    Volume (Year): 3 (2009)
    Issue (Month): 2 (July)
    Pages: 123-142

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    Handle: RePEc:fau:aucocz:au2009_123

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    Related research

    Keywords: Value-added tax; tax incidence; consumption taxes;

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    1. John R. Swinton & Christopher R. Thomas, 2001. "Using Empirical Point Elasticities to Teach Tax Incidence," The Journal of Economic Education, Taylor & Francis Journals, vol. 32(4), pages 356-368, January.
    2. Sam Peltzman, 1998. "Prices Rise Faster Than They Fall," University of Chicago - George G. Stigler Center for Study of Economy and State 142, Chicago - Center for Study of Economy and State.
    3. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
    4. Coenen, Günter & McAdam, Peter & Straub, Roland, 2007. "Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model," Working Paper Series 0747, European Central Bank.
    5. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 157-78, June.
    6. Chouinard, Hayley & Perloff, Jeffrey M., 2004. "Incidence of federal and state gasoline taxes," Economics Letters, Elsevier, vol. 83(1), pages 55-60, April.
    7. European Commission, 2008. "Taxation trends in the European Union: 2008 edition," Taxation trends 2008, Directorate General Taxation and Customs Union, European Commission.
    8. Brita Bye & Birger Strøm & Turid Åvitsland, 2003. "Welfare effects of VAT reforms: A general equilibrium analysis," Discussion Papers 343, Research Department of Statistics Norway.
    9. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    10. Tillmann, Peter, 2005. "The New Keynesian Phillips Curve in Europe: does it fit or does it fail?," Discussion Paper Series 1: Economic Studies 2005,04, Deutsche Bundesbank, Research Centre.
    11. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, EconWPA.
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    Cited by:
    1. Matti Viren, 2013. "Is the housing allowance shifted to rental prices?," Empirical Economics, Springer, vol. 44(3), pages 1497-1518, June.
    2. Mala, Zdenka & Maly, Michal, 2012. "Impact of Government Reform on Beef Market," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 4(4), December.

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