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The full, persistent, and symmetric pass-through of a temporary VAT cut

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  • Bernardino, Tiago
  • Gabriel, Ricardo Duque
  • Quelhas, João
  • Silva-Pereira, Márcia

Abstract

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices in Portugal. Exploiting a novel data set of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We discuss two potential mechanisms driving this result: the policy’s salience to consumers in a high-inflation environment and the decline in producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.

Suggested Citation

  • Bernardino, Tiago & Gabriel, Ricardo Duque & Quelhas, João & Silva-Pereira, Márcia, 2025. "The full, persistent, and symmetric pass-through of a temporary VAT cut," Journal of Public Economics, Elsevier, vol. 248(C).
    • Handle: RePEc:eee:pubeco:v:248:y:2025:i:c:s0047272725001148
    DOI: 10.1016/j.jpubeco.2025.105416
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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