The Role of Market Structure and Timing in Determining VAT Pass-Through

IMF Working Papers, March 5, 2021

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Objective: Examine the role of market characteristics and timing in explaining observed heterogeneity in VAT pass-through.
Core approach: Extend existing theory to characterize the roles of imperfect competition and product differentiation; empirically investigate these relationships.
Empirical scope: Panel of 14 Eurozone countries between 1999 and 2013.
Key qualitative conclusion: Important roles for product market regulation and product quality; little impact of advance announcement of reforms.

Extensions to existing theory focus on:
- Imperfect competition.
- Product differentiation.
Aim: Characterize how these market features influence the division of tax burden between consumers and producers (pass-through).

Data and period:
- Panel of 14 Eurozone countries between 1999 and 2013.
Main empirical results:
- Product market regulation plays an important role in VAT pass-through.
- Product quality is an important determinant of pass-through heterogeneity.
- Advance announcement of VAT reforms has little impact on pass-through outcomes.
Implication on incidence:
- Heterogeneity in pass-through across settings determines whether consumers or producers bear the brunt of a VAT reform.

For policy-makers considering VAT rate adjustments:
- Assess product market regulation environments when predicting pass-through to consumer prices.
- Consider product quality heterogeneity across sectors when estimating incidence.
- Do not rely on advance announcement as a tool to materially alter pass-through outcomes, given its limited observed impact.

Author: Matthieu Bellon
Date: March 5, 2021
Series: IMF Working Papers, Working Paper No. 2021/061
Pages: 56
DOI: https://doi.org/10.5089/9781513571546.001
Subjects: Commodity markets; Competition; Consumer prices; Consumption; Economic sectors; Financial crises; Financial markets; National accounts; Prices; Taxes; Value-added tax

IMF Working Paper — "The Role of Market Structure and Timing in Determining VAT Pass-Through" by Matthieu Bellon, March 5, 2021.