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Journal of Political Economy Vol. 128 No. 12 2020

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

Youssef Benzarti1,2; Dorian Carloni3; Jarkko Harju4; Tuomas Kosonen5

1 National Bureau of Economic Research · 2 University of California, Santa Barbara · 3 Congressional Budget Office · 4 VATT Institute for Economic Research · 5 Labour Institute for Economic Research

Abstract

This paper provides evidence that prices respond significantly more strongly to increases than to decreases in value-added taxes (VATs). First, using two plausibly exogenous VAT changes, we show that prices respond twice as much to VAT increases as to VAT decreases. Second, we show that this asymmetry results in higher equilibrium profits and markups. Third, we find that firms operating with low profit margins are particularly likely to respond asymmetrically to VAT changes. Fourth, these asymmetric price effects persist several years after VAT changes take place. Fifth, using all VAT changes in the European Union from 1996 to 2015, we find similar levels of asymmetry.

DOI
10.1086/710558
Volume
128
Issue
12
Pages
4438-4474
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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