Uneven passthrough of VAT cuts to food prices: Evidence from scanner data

This presentation studies how consumer prices responded to two permanent VAT reductions in Slovakia, both lowering the rate from 20% to 10%, first for essential staples in 2016 and later for a broader set of goods in 2020. Leveraging detailed scanner data and a synthetic difference-in-differences framework, I find that VAT passthrough is highly heterogeneous depending on product attributes, demand elasticity, and policy design. The 2016 reform, which targeted clearly defined essential goods and was announced well in advance, led to full and persistent price reductions. The 2020 reform, applied to a loosely defined category of healthy goods with limited legislative lead time, produced only partial and short-lived price effects, with passthrough largely reversing within six weeks. These contrasting outcomes identify policy design as a key determinant of passthrough. Well-targeted VAT cuts on essential goods with inelastic demand can deliver meaningful and durable consumer price relief, while broader or less transparent interventions risk increasing retailer margins without lasting benefits for consumers.