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Consumption Tax Incidence: Evidence from Natural Experiment in the Czech Republic

Jan Zapal ()

ACTA VSFS, 2014, vol. 8, issue 2, 149-166

Abstract: This paper estimates incidence of consumption taxation. We use data from natural experiment that took place in 2004 in the Czech Republic. Not only the value added tax (VAT) rates applicable to a range of goods and services changed but also the classification into the standard vs. reduced rate group has been modified. Most importantly, some goods and services experienced no change. This allows us to use difference-in-differences estimation to assess the extent to which taxes are shifted on consumers. Our estimates indicate that those goods and services that experienced decline of the VAT rate from 22% to 19% show no evidence of decrease in prices. We interpret this as evidence of producers and vendors taking the full advantage of the tax decline. On the other hand, goods and services belonging to the group that experienced VAT rate increase from 5% to 19% show lasting increase of prices by up to 6%. This indicates that the higher tax is at least partially shifted on consumers.

Keywords: tax incidence; value added tax; difference-in-differences estimation; natural experiment (search for similar items in EconPapers)
JEL-codes: H22 (search for similar items in EconPapers)
Date: 2014
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