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The Incidence of VAT Reforms in Electricity Markets: Evidence from Belgium

Author

Listed:
  • Hindriks, Jean

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Serse, Valerio

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

Abstract

In April 2014, the Belgian government reduced the VAT rate on the electricity price from 21% to 6% to support low-income families. In September 2015, the tax cut was repealed, and the VAT rate was reinstated to 21% in the context of a change of government. This paper investigates the impact of such temporary and (plausibly) exogenous VAT reform on the Belgian electricity market. We study the pass-through of the VAT reform to electricity prices and the effect of this (exogenous) price change on electricity demand. We estimate the VAT pass-through on residential electricity prices by a difference-in-differences method, using business electricity prices (not subject to VAT) as a control group. Our findings reveal that both the tax cut and the tax hike were entirely shifted to the electricity price (100% pass-through). To assess the impact of the VAT change on demand, we perform a counterfactual demand analysis of the electricity flowing monthly over the grid at the network operator level. Exploiting VAT and non-VAT related price variations, our results show a price elasticity of residential demand for electricity between -0.09 and -0.17. Interestingly, we also find that demand reacted quickly and symmetrically to the VAT cut and the subsequent VAT hike.

Suggested Citation

  • Hindriks, Jean & Serse, Valerio, 2021. "The Incidence of VAT Reforms in Electricity Markets: Evidence from Belgium," LIDAM Reprints CORE 3188, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:3188
    DOI: https://doi.org/10.1016/j.ijindorg.2021.102809
    Note: In: International Journal of Industrial Organization, 2021, 102809
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    Cited by:

    1. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2020. "The Pass-Through of Temporary VAT Rate Cuts in German Supermarket Retail," ifo Working Paper Series 341, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Gechert, Sebastian & Mey, Bianka & Prante, Franz & Schäfer, Teresa, 2025. "The Price Elasticity of Heating and Cooling Energy Demand," OSF Preprints 4sjy5_v2, Center for Open Science.
    3. De Groote, Olivier & Gautier, Axel & Verboven, Frank, 2024. "The political economy of financing climate policy — Evidence from the solar PV subsidy programs," Resource and Energy Economics, Elsevier, vol. 77(C).
    4. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2025. "The pass-through of temporary VAT rate cuts: evidence from German supermarket retail," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(1), pages 51-97, February.
    5. Bart Capéau & Duygu Güner & Nabil Sheikh Hassan & Jonas Vanderkelen & Toon Vanheukelom & Stijn Van Houtven & André Decoster, 2022. "We Are All Facing The Same Storm, But Not All Are In The Same Boat. A Distributional Picture Of The Purchasing Power Effects Of The 2021‐22 Energy Price Shock And Compensating Measures," Working Papers ECARES 2022-05, ULB -- Universite Libre de Bruxelles.
    6. Alisa Frey & Justus Haucap, 2024. "VAT pass-through: the case of a large and permanent reduction in the market for menstrual hygiene products," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 160-202, February.
    7. Jiaming Li & Yibo Li & Yulin Liu, 2023. "China’s value-added tax policy and intertemporal optimal assets allocation of enterprises——Based on the dual perspectives of VAT input refund and VAT rate," PLOS ONE, Public Library of Science, vol. 18(8), pages 1-36, August.
    8. Brusco, Giacomo & Velayudhan, Tejaswi, 2025. "VAT incidence in real VAT systems," Journal of Public Economics, Elsevier, vol. 249(C).

    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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