Do Small Value-Added Tax Rate Decreases on Groceries Imply Lower Prices for Consumers?

Arkadiusz Bernal

Eastern European Economics, 2018, vol. 56, issue 1, 81-98

Abstract: In the vast majority of countries where a value-added tax (VAT) is in force, basic groceries are taxed at reduced rates. The reduced tax rates are intended to ensure the lowest possible prices for those products for consumers, but this does not always happen. The objective of this article is to determine whether the small reduction in the VAT rate on groceries, from 7% to 5%, which took place in January 2011 in Poland, resulted in lower prices for consumers, and the research does not support the conclusion that the government’s reduction of the VAT on basic foodstuffs had that effect. Behavioral economics and psychology can explain the absence of price reductions. The conclusions drawn have important implications for tax policy.

Date: 2018
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DOI: 10.1080/00128775.2017.1412265

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