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Consumer Demand System Estimation and Value Added Tax Reforms in the Czech Republic

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  • Petr Jansky

    ()
    (Institute for Fiscal Studies and Charles University)

Abstract

Reforms of indirect taxes, such as the recent changes in rates of value added tax (VAT) in the Czech Republic, change prices of products and services to which households can respond by adjusting their expenditures. I estimate the behavioural response of consumers to price changes in the Czech Republic applying a consumer demand model of the quadratic almost ideal system (QUAIDS) form to the Czech Statistical Office data for the period from 2001 to 2011. I then derive the estimates of own- and cross-price and income elasticities and I use these to estimate the impact of changes in VAT rates, which were proposed or implemented between 2011 and 2013, on households and government revenues. I further find that this method, which allows for behavioural response, yields lower estimates of changes in VAT revenues than when I use the standard static simulation. These relatively small, but statistically significant differences might partly explain the past cases, and might lead to future cases, of the over-estimation of VAT revenues by the Ministry of Finance of the Czech Republic.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W13/20.

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Date of creation: Aug 2013
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Handle: RePEc:ifs:ifsewp:13/20

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Keywords: consumer behaviour; demand system; QUAIDS; value added tax; Czech Republic;

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  1. Brian P. Poi, 2002. "From the help desk: Demand system estimation," Stata Journal, StataCorp LP, vol. 2(4), pages 403-410, November.
  2. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  3. Barbora Slintáková & Stanislav Klazar, 2010. "Impact of Harmonisation on Distribution of VAT in the Czech Republic," Prague Economic Papers, University of Economics, Prague, vol. 2010(2), pages 133-149.
  4. Ondřej Schneider, 2004. ": Who Pays Taxes and Who Gets Benefits in the Czech Republic," Working Papers IES 68, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  5. Brian P. Poi, 2008. "Demand-system estimation: Update," Stata Journal, StataCorp LP, vol. 8(4), pages 554-556, December.
  6. Karel Janda & Jill J. McCluskey & Gordon C. Rausser, 2000. "Food Import Demand in the Czech Republic," Journal of Agricultural Economics, Wiley Blackwell, vol. 51(1), pages 22-44.
  7. Atkinson, A B & Gomulka, J & Stern, N H, 1990. "Spending on Alcohol: Evidence from the Family Expenditure Survey 1970-1983," Economic Journal, Royal Economic Society, vol. 100(402), pages 808-27, September.
  8. James Banks & Richard Blundell & Arthur Lewbel, 1994. "Tax reform and welfare measurement: do we need demand system estimation?," IFS Working Papers W94/11, Institute for Fiscal Studies.
  9. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  10. Kamil Dybczak & Peter Toth & David Vonka, 2010. "Effects of Price Shocks to Consumer Demand. Estimating the QUAIDS Demand System on Czech Household Budget Survey Data," Working Papers 2010/08, Czech National Bank, Research Department.
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