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Stimulus Effect of a Value-added Tax Cut: Evidence from the UK Tax Returns Data

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  • Vesal, Mohammad

Abstract

In response to the great recession of 2008, the UK government used a temporary value-added tax rate reduction as its main stimulus policy. From 1 December 2008 to 31 December 2009, the standard-rate of value-added tax was reduced from 17.5 to 15 percent while the existing zero-rate did not change. I use the universe of VAT returns between 2002q1 to 2010q4 to compare changes in sales growth for standard-rated traders to that of zero-rated traders (difference-in-differences). I find an insignificant small impact on sales growth once I allow for heterogeneous effects of the recession either by a) relying solely on post-recession observations or b) controlling for two-digit sector specific recession impacts. Subject to full pass through of the rate cut to consumer prices, a zero effect on sales growth is reflective of a proportionate increase in sales quantity (unit elasticity).

Suggested Citation

  • Vesal, Mohammad, 2017. "Stimulus Effect of a Value-added Tax Cut: Evidence from the UK Tax Returns Data," MPRA Paper 101016, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101016
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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