The Incidence of VAT Reforms in Electricity Markets: Evidence from Belgium

Jean Hindriks and Valerio Serse

No 3188, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In April 2014, the Belgian government reduced the VAT rate on the electricity price from 21% to 6% to support low-income families. In September 2015, the tax cut was repealed, and the VAT rate was reinstated to 21% in the context of a change of government. This paper investigates the impact of such temporary and (plausibly) exogenous VAT reform on the Belgian electricity market. We study the pass-through of the VAT reform to electricity prices and the effect of this (exogenous) price change on electricity demand. We estimate the VAT pass-through on residential electricity prices by a difference-in-differences method, using business electricity prices (not subject to VAT) as a control group. Our findings reveal that both the tax cut and the tax hike were entirely shifted to the electricity price (100% pass-through). To assess the impact of the VAT change on demand, we perform a counterfactual demand analysis of the electricity flowing monthly over the grid at the network operator level. Exploiting VAT and non-VAT related price variations, our results show a price elasticity of residential demand for electricity between -0.09 and -0.17. Interestingly, we also find that demand reacted quickly and symmetrically to the VAT cut and the subsequent VAT hike.

Keywords: Tax incidence; VAT reform; demand elasticity; electricity markets (search for similar items in EconPapers)
JEL-codes: H21 H22 H23 Q41 Q48 (search for similar items in EconPapers)
Pages: 47
Date: 2021-05-01
Note: In: International Journal of Industrial Organization, 2021, 102809
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The incidence of VAT reforms in electricity markets: Evidence from Belgium (2022)
Working Paper: The incidence of VAT reforms in electricity markets: Evidence from Belgium (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3188

DOI: 10.1016/j.ijindorg.2021.102809

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