Does the value-added tax shift to consumption prices?

Working Papers 250 Matti Virén

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 period 1997–2004. A general result of all analyses is that about two thirds of a tax increase shifts to consumer prices. By contrast, there is less evidence on shifts to producer prices.

Keywords: Value-added tax, tax incidence, consumption taxes
Published: 1.4.2009
JEL: H22
ISBN: 978-952-209-067-6
ISSN: 1795-1801
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