The Spending and Consumption Response to A VAT Rate Increase
David Cashin and
Takashi Unayama
National Tax Journal, 2021, vol. 74, issue 2, 313 - 346
Abstract:
This study estimates the effect of an increase in Japan’s value-added tax (VAT) rate on the timing of household expenditures and consumption, which do not necessarily coincide. The empirical analysis finds that spending on a wide range of durables and storables surged in the months prior to the tax rate increase, fell sharply upon implementation, but returned to their previous long-run levels within a few months. Nonstorable, nondurable expenditures increased slightly in the month prior to the tax rate increase but were otherwise unresponsive. A dynamic structural model of household consumption reveals that the observed spending responses were driven by stockpiling behavior, the insensitivity of durable and nondurable consumption to the tax rate increase, and strong complementarities between durables and nondurables. By mapping durable and storable expenditures into consumption, the model allows for a considerably more precise estimate of the intertemporal elasticity of substitution in consumption than the standard method, which focuses on nondurable spending only. The results, external validity checks, and marginal excess burden calculation suggest that anticipated changes in VAT rates have a large, though highly transitory, impact on household spending that generates miniscule efficiency costs.
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (4)
Downloads: (external link)
http://dx.doi.org/10.1086/714368 (application/pdf)
http://dx.doi.org/10.1086/714368 (text/html)
Access to the online full text or PDF requires a subscription.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ucp:nattax:doi:10.1086/714368
Access Statistics for this article
More articles in National Tax Journal from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().