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What was actually cut in the barbers' VAT cut?

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  • Tuomas Kosonen

Abstract

The tax incidence of consumption taxes across various sectors of the economy is a key aspect when designing a tax structure. However, there are very few empirical findings on this subject. This paper studies the tax incidence of consumption taxes utilising a VAT reform targeted at labour-intensive services in Finland. The reform creates a natural experiment set-up, because the reduced VAT was targeted at hairdressers, whereas the normal tax treatment still applied to beauty salons. This experiment is exogenous to the economic conditions of hairdressers in Finland, since this group was selected in a European Commission Directive. I study the effects of the reform on prices and demand. The results suggest that barbers cut their prices only by half of what complete pass-through would have implied. Using the experiment as an instrument, I find little effect on demand. Thus, there does not seem to be any indication of a significant effect on labour demand.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 18.

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Date of creation: 23 Nov 2010
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Handle: RePEc:fer:wpaper:18

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Keywords: Consumption tax incidence; VAT; labour intensive services;

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Cited by:
  1. Essi Eerola & Teemu Lyytikäinen, 2012. "On the role of public price information in housing markets," Working Papers 30, Government Institute for Economic Research Finland (VATT).

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