IDEAS home Printed from https://ideas.repec.org/p/ifs/ifsewp/14-16.html
   My bibliography  Save this paper

Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK

Author

Listed:
  • Thomas Crossley

    (Institute for Fiscal Studies and University of Essex and European University Institute)

  • Hamish Low

    (Institute for Fiscal Studies and University of Oxford & Nuffield College)

  • Cath Sleeman

    (Institute for Fiscal Studies and Nesta)

Abstract

This paper evaluates a novel form of fiscal stimulus: a temporary cut in the rate of Value Added Tax (VAT). In December 2008, the UK cut the standard rate of VAT by 2.5 percentage points for 13 months in an effort to stimulate spending. We estimate the effect of the cut on prices and spending using alternative strategies for identifying the counter-factual. Although firms initially passed through the VAT cut by lowering their prices, at least part of the pass through of the VAT cut was reversed after only a few months. Despite this early reversal, the cut raised the volume of retail sales by around 1% which on its own generates a 0.4% increase in total expenditure. The cut raised retail sales by encouraging consumers to bring forward their purchases and we find a significant fall in sales after the VAT cut ended. Thus an indirect tax cut stimulates significant intertermporal substitution in purchases.

Suggested Citation

  • Thomas Crossley & Hamish Low & Cath Sleeman, 2014. "Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK," IFS Working Papers W14/16, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:14/16
    as

    Download full text from publisher

    File URL: https://www.ifs.org.uk/uploads/publications/wps/wp201416.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Thomas F. Crossley & Hamish Low & Cormac O'Dea, 2013. "Household Consumption through Recent Recessions," Fiscal Studies, Institute for Fiscal Studies, vol. 34(2), pages 203-229, June.
    2. Timothy G. Conley & Christopher R. Taber, 2011. "Inference with "Difference in Differences" with a Small Number of Policy Changes," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 113-125, February.
    3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    4. Mr. Stephan Danninger & Ms. Alina Carare, 2008. "Inflation Smoothing and the Modest Effect of VAT in Germany," IMF Working Papers 2008/175, International Monetary Fund.
    5. Richard Blundell, 2009. "Assessing the Temporary VAT Cut Policy in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 31-38, March.
    6. Poterba, James M., 1996. "Retail Price Reactions to Changes in State and Local Sales Taxes," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(2), pages 165-176, June.
    7. Ray Barrell & Martin Weale, 2009. "The Economics of a Reduction in VAT," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 17-30, March.
    8. David CASHIN & UNAYAMA Takashi, 2012. "Short-run Distributional Effects of VAT Rate Change: Evidence from a consumption tax rate increase in Japan," Discussion papers 12029, Research Institute of Economy, Trade and Industry (RIETI).
    9. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    10. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 157-178, June.
    11. David CASHIN & UNAYAMA Takashi, 2011. "The Intertemporal Substitution and Income Effects of a VAT Rate Increase: Evidence from Japan," Discussion papers 11045, Research Institute of Economy, Trade and Industry (RIETI).
    12. Doyle Jr., Joseph J. & Samphantharak, Krislert, 2008. "$2.00 Gas! Studying the effects of a gas tax moratorium," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 869-884, April.
    13. Ray Barrell & Martin Weale, 2009. "The Economics of a Reduction in VAT," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 17-30, March.
    14. Watanabe, Katsunori & Watanabe, Takayuki & Watanabe, Tsutomu, 2001. "Tax policy and consumer spending: evidence from Japanese fiscal experiments," Journal of International Economics, Elsevier, vol. 53(2), pages 261-281, April.
    15. Martin Browning & Thomas F. Crossley, 2000. "Luxuries Are Easier to Postpone: A Proof," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1022-1026, October.
    16. Poterba, James M., 1996. "Retail Price Reactions to Changes in State and Local Sales Taxes," National Tax Journal, National Tax Association, vol. 49(2), pages 165-76, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bańkowski, Krzysztof, 2023. "Fiscal policy in the semi-structural model ECB-BASE," Working Paper Series 2802, European Central Bank.
    2. Désirée I. Christofzik & Angela Fuest & Robin Jessen, 2022. "Macroeconomic Effects of the Anticipation and Implementation of Tax Changes in Germany: Evidence from a Narrative Account," Economica, London School of Economics and Political Science, vol. 89(353), pages 62-81, January.
    3. Florian Dorn & Clemens Fuest & Florian Neumeier, 2020. "After the Great Economic Collapse: Germany’s Stimulus Package to Recover the Economy in Times of Covid-19," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(02), pages 38-46, July.
    4. Clemens Fuest & Florian Neumeier & Andreas Peichl, 2021. "Hat die Mehrwertsteuersenkung den Konsum belebt?," ifo Schnelldienst Digital, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(1), January.
    5. Gómez-Antonio, Miguel & del Moral Arce, Ignacio & Hortas-Rico, Miriam, 2022. "Are VAT reforms an effective tool for promoting culture? A quasi-experiment in Spain," Journal of Policy Modeling, Elsevier, vol. 44(5), pages 1016-1040.
    6. Funke, Michael & Terasa, Raphael, 2022. "Has Germany’s temporary VAT rates cut as part of the COVID-19 fiscal stimulus boosted growth?," Journal of Policy Modeling, Elsevier, vol. 44(2), pages 450-473.
    7. Bachmann, Rüdiger & Born, Benjamin & Goldfayn-Frank, Olga & Kocharakov, Georgi & Luetticke, Ralph & Weber, Michael, 2021. "A Temporary VAT Cut as Unconventional Fiscal Policy," CEPR Discussion Papers 16690, C.E.P.R. Discussion Papers.
    8. Florian Dorn & Clemens Fuest & Florian Neumeier, 2020. "After the Big Slump: A Stimulus Package to Support and Recover the Economy," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(07), pages 03-12, July.
    9. Rittenhouse, Katherine & Zaragoza-Watkins, Matthew, 2018. "Anticipation and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 255-277.
    10. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2020. "Die Preiseffekte der Mehrwertsteuersenkung in deutschen Supermärkten: Eine Analyse für mehr als 60 000 Produkte," ifo Schnelldienst Digital, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(13), November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Franz W. Wagner & Stefan Weber, 2016. "Wird die Umsatzsteuer überwälzt? [Do Firms Pass on VAT?]," Schmalenbach Journal of Business Research, Springer, vol. 68(4), pages 401-421, December.
    2. Asatryan, Zareh & Gomtsyan, David, 2020. "The incidence of VAT evasion," ZEW Discussion Papers 20-027, ZEW - Leibniz Centre for European Economic Research.
    3. Ricardo Batista Politi & Enlinson Mattos, 2011. "Ad-valorem tax incidence and after-tax price adjustments: evidence from Brazilian basic basket food," Canadian Journal of Economics, Canadian Economics Association, vol. 44(4), pages 1438-1470, November.
    4. Dora Benedek & Ruud A. Mooij & Michael Keen & Philippe Wingender, 2020. "Varieties of VAT pass through," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 890-930, August.
    5. Richard Blundell, 2009. "Assessing the Temporary VAT Cut Policy in the UK," Fiscal Studies, John Wiley & Sons, vol. 30(1), pages 31-38, March.
    6. Ms. Dora Benedek & Ruud A. de Mooij & Mr. Philippe Wingender, 2015. "Estimating VAT Pass Through," IMF Working Papers 2015/214, International Monetary Fund.
    7. John Cawley & David Frisvold & David Jones & Chelsea Lensing, 2021. "The Pass‐Through of a Tax on Sugar‐Sweetened Beverages in Boulder, Colorado," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 987-1005, May.
    8. Mats Petter Kahl, 2023. "Was the German fuel discount passed on to consumers?," Working Paper Series in Economics 419, University of Lüneburg, Institute of Economics.
    9. Doyle Jr., Joseph J. & Samphantharak, Krislert, 2008. "$2.00 Gas! Studying the effects of a gas tax moratorium," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 869-884, April.
    10. Kosonen, Tuomas, 2015. "More and cheaper haircuts after VAT cut? On the efficiency and incidence of service sector consumption taxes," Journal of Public Economics, Elsevier, vol. 131(C), pages 87-100.
    11. Yilmazkuday, Hakan, 2017. "Asymmetric incidence of sales taxes: A short-run investigation of gasoline prices," Journal of Economics and Business, Elsevier, vol. 91(C), pages 16-23.
    12. Haan, Peter & Simmler, Martin, 2018. "Wind electricity subsidies — A windfall for landowners? Evidence from a feed-in tariff in Germany," Journal of Public Economics, Elsevier, vol. 159(C), pages 16-32.
    13. John Cawley & Chelsea Crain & David Frisvold & David Jones, 2018. "The Pass-Through of the Largest Tax on Sugar-Sweetened Beverages: The Case of Boulder, Colorado," NBER Working Papers 25050, National Bureau of Economic Research, Inc.
    14. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2016. "The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through," Cowles Foundation Discussion Papers 2038R3, Cowles Foundation for Research in Economics, Yale University, revised Mar 2018.
    15. Andrej Cupák & Peter Tóth, 2017. "Measuring the Efficiency of VAT reforms: Evidence from Slovakia," Working and Discussion Papers WP 6/2017, Research Department, National Bank of Slovakia.
    16. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2020. "Energy Cost Pass-Through in US Manufacturing: Estimates and Implications for Carbon Taxes," American Economic Journal: Applied Economics, American Economic Association, vol. 12(2), pages 303-342, April.
    17. Panayiota Lyssiotou & Elena Savva, 2021. "Who pays taxes on basic foodstuffs? Evidence from broadening the VAT base," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(1), pages 212-247, February.
    18. Arkadiusz Bernal, 2018. "The Value Added Tax Incidence – the Case of the Book Market in CEE Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(2), pages 144-164, April.
    19. Lars-H. R. Siemers, 2014. "A General Microsimulation Model for the EU VAT with a specific Application to Germany," International Journal of Microsimulation, International Microsimulation Association, vol. 7(2), pages 40-93.
    20. Büttner, Thiess & Madzharova, Boryana, 2017. "The Effects of Pre-announced Consumption Tax Reforms on the Sales and Prices of Consumer Durables," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168201, Verein für Socialpolitik / German Economic Association.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ifs:ifsewp:14/16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emma Hyman (email available below). General contact details of provider: https://edirc.repec.org/data/ifsssuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.