The Full, Persistent, and Symmetric Pass-Through of a Temporary VAT Cut

Abstract

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices. Exploiting a novel dataset of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We provide evidence for two mechanisms driving this result; the policy’s salience to consumers in a high inflation environment and the decline of producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.