Dining and Wining During the Pandemic? A Quasi-Experiment on Tax Cuts and Consumer Spending in Lithuania

Serhan Cevik

No 2023/188, IMF Working Papers from International Monetary Fund

Abstract: Could temporary tax cuts stimulate consumer spending? Sector-specific measures to the COVID-19 pandemic provides a quasi-experimental variation in consumption patterns to infer a causal effect of tax policy changes. Using a novel dataset of daily debit and credit card transactions, this paper investigates the effectiveness of Lithuania’s decision to cut the standard value-added tax (VAT) rate from 21 percent to 9 percent on restaurants and catering services during the pandemic in a difference-in-differences regression framework. I obtain robust evidence that the VAT reduction has had no statistically significant impact on consumer spending on restaurants and catering services, while other policy interventions such as mobility restrictions and vaccination have more pronounced effects. These results have important policy implications in terms of the expected stimulative effect of sector-specific VAT reductions and the effective design of fiscal policy interventions to counter the impact of pandemics during which mobility is highly constrained.

Keywords: Tax policy; value-added tax; consumer spending; pandemic; difference-in-differences; Lithuania; VAT reduction; credit card transactions; consumer spending in Lithuania; novel dataset; consumer spending category; COVID-19; Consumer credit; Consumption; Europe; Baltics (search for similar items in EconPapers)
Pages: 15
Date: 2023-09-08
New Economics Papers: this item is included in nep-eur, nep-ger, nep-pbe, nep-pub and nep-tra
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Journal Article: Dining and Wining During the Pandemic? A Quasi-Experiment on Tax Cuts and Consumer Spending in Lithuania (2024)
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