A Temporary VAT Cut in Three Acts: Announcement, Implementation, and Reversal

We investigate the pass-through of a Value-Added Tax (VAT) decrease to consumer prices, using Portugal’s temporary cut in VAT for a subset of food items in 2023 as a laboratory. Exploiting a novel high-frequency dataset of online retail prices, we use an event study approach to analyze price dynamics across the complete policy lifetime. We find that prices rose by around 1% upon announcement, that the pass-through was almost complete when the policy was implemented, and that the pass-through was approximately 70% at the reversal of the policy. The price reduction was highly persistent over the entire duration of the policy. We estimate that the policy decreased month-on-month inflation by 0.7 percentage points. We find evidence of deflation in producer prices around the implementation, which could be a potential mechanism driving the high pass-through.

Keywords: Value-Added Tax, Pass-through, Public Policy, Inflation

JEL Classification: E31, H20, H22

Suggested Citation: Suggested Citation

Bernardino, Tiago and Gabriel, Ricardo Duque and Quelhas, João Nuno and Pereira, Márcia Lopes Sousa da Silva, A Temporary VAT Cut in Three Acts: Announcement, Implementation, and Reversal (March 29, 2024). Available at SSRN: https://ssrn.com/abstract=4788047 or http://dx.doi.org/10.2139/ssrn.4788047