The incidence of VAT reforms in electricity markets: Evidence from Belgium

Jean Hindriks and Valerio Serse

No 2020012, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In April 2014, the Belgian government reduced the VAT rate on the electricity price from 21% to 6%. In September 2015, however, this tax cut was repealed, and the VAT rate was reinstated to 21%. This paper investigates the impact of such temporary exogenous VAT reform on the Belgian electricity market. We study both the pass-through of the VAT reform to electricity prices and the effect of this (exogenous) price change on electricity consumption. We estimate the VAT pass-through by a difference-in-differences approach using business electricity prices (not subject to VAT) as a control group. To estimate the impact of the VAT change on demand, we perform an event study on the electricity flowed monthly over the grid at the network operator level. Our findings reveal that both the tax cut and the tax hike were entirely shifted to the electricity price (i.e., 100%). Exploiting different sources of price variation, our results reveal a price elasticity of residential demand for electricity between -0.09 and -0.17. Interestingly, we also find that consumption reacted quickly and symmetrically to the VAT cut and the subsequent VAT hike.

Keywords: tax incidence; VAT reform; demand elasticity; electricity markets (search for similar items in EconPapers)
JEL-codes: H21 H22 H23 Q41 Q48 (search for similar items in EconPapers)
Date: 2020-02-11
New Economics Papers: this item is included in nep-ene, nep-eur, nep-pbe and nep-reg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The incidence of VAT reforms in electricity markets: Evidence from Belgium (2022)
Working Paper: The Incidence of VAT Reforms in Electricity Markets: Evidence from Belgium (2021)
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