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Who pays taxes on basic foodstuffs? Evidence from broadening the VAT base

Panayiota Lyssiotou () and Elena Savva
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Panayiota Lyssiotou: University of Cyprus
Elena Savva: University of Cyprus

International Tax and Public Finance, 2021, vol. 28, issue 1, No 8, 212-247

Abstract: Abstract We exploit the introduction of a 5% VAT on very essential food products (like fresh milk, coffee, yogurt, cheese) that occurred when an EU member state had to harmonize its VAT legislation with the EU VAT legislation. Preceding this reform, there was a removal of the zero VAT rate and imposition of 5% VAT rate on other food items that were considered less essential (juices, bottled water). We adopt a difference-in-difference approach as the price data support the common trends identifying assumption. On average, the tax was shifted fully to the consumer within the first month after the reform. However, there are differences even across seemingly related goods as some of them experienced overshifting of the pass through effect. The prices of goods in the control group did not change. These estimates are robust to alternative specifications and can be useful to other countries considering to broaden their VAT base by taxing basic groceries.

Keywords: Commodity taxation; Tax burden; Tax incidence; Pass through; Tax harmonization (search for similar items in EconPapers)
JEL-codes: D4 H22 H32 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10797-020-09605-6

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