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Does the Value-Added Tax Shift to Consumption Prices?

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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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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  1. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  2. Timothy J. Besley & Harvey S. Rosen, 1998. "Sales Taxes and Prices: An Empirical Analysis," NBER Working Papers 6667, National Bureau of Economic Research, Inc.
  3. 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.
  4. Brita Bye & Birger Strøm & Turid Åvitsland, 2003. "Welfare effects of VAT reforms: A general equilibrium analysis," Discussion Papers 343, Statistics Norway, Research Department.
  5. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, EconWPA.
  6. Chouinard, Hayley & Perloff, Jeffrey M, 2003. "Incidence of federal and state gasoline taxes," CUDARE Working Paper Series 952, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  7. Don Fullerton & Gilbert E. Metcalf, 2002. "Tax Incidence," NBER Working Papers 8829, National Bureau of Economic Research, Inc.
    • 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.
  8. 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.
  9. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
  10. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
  11. European Commission, 2008. "Taxation trends in the European Union: 2008 edition," Taxation trends 2008, Directorate General Taxation and Customs Union, European Commission.
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