What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes

Working Papers 317 Youssef Benzarti, Dorian Carloni, Jarkko Harju, Tuomas Kosonen

Abstract

This paper shows that prices respond more to increases than to decreases in Value-Added Taxes (VATs). First, using all VAT reforms from 1996 to 2015 across all European countries we show that prices respond 3 to 4 times more to VAT increases than decreases. Second, using a plausibly exogenous VAT reform, we show that the asymmetry persists over several years. Third, we document several empirical features of this asymmetry that are inconsistent with the standard incidence model. We provide evidence consistent with firm behavior driving the asymmetry. Additionally, according to our empirical results, due to asymmetric pass-through to prices, firms benefit from VAT changes to opposite directions in the form of higher profits.

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