From VAT Cuts to Price Tags: Evidence from Scanner Data

This paper examines how consumer prices responded to two permanent VAT reductions in Slovakia, which lowered 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, we find that VAT pass-through is highly heterogeneous: it can be full or incomplete, depending on product attributes, demand elasticity, and policy design. The 2016 reform, which targeted clearly defined essential goods, led to complete and persistent price re- ductions. In contrast, the 2020 reform, applied to a loosely defined category of healthy goods, produced only partial and short-lived price effects. Our findings underscore the importance of careful policy design, and suggest that well-targeted VAT cuts can deliver meaningful consumer price relief, while broader or less transparent interventions may instead boost retailer margins without durable benefits for shoppers.