What Was Actually Cut in the Barbers’ VAT Cut?

Government Institute for Economic Research Working Papers No. 18/2010

32 Pages Posted: 13 Sep 2011

See all articles by Tuomas Kosonen

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Date Written: October 11, 2010

Abstract

The tax incidence of consumption taxes across various sectors of the economy is a key aspect when designing a tax structure. However, there are very few empirical findings on this subject. This paper studies the tax incidence of consumption taxes utilising a VAT reform targeted at labour-intensive services in Finland. The reform creates a natural experiment set-up, because the reduced VAT was targeted at hairdressers, whereas the normal tax treatment still applied to beauty salons. This experiment is exogenous to the economic conditions of hairdressers in Finland, since this group was selected in a European Commission Directive. I study the effects of the reform on prices and demand. The results suggest that barbers cut their prices only by half of what complete pass-through would have implied. Using the experiment as an instrument, I find little effect on demand. Thus, there does not seem to be any indication of a significant effect on labour demand.

Keywords: Consumption tax incidence, VAT, labour intensive services

Suggested Citation

Kosonen, Tuomas, What Was Actually Cut in the Barbers’ VAT Cut? (October 11, 2010). Government Institute for Economic Research Working Papers No. 18/2010, Available at SSRN: https://ssrn.com/abstract=1926700 or http://dx.doi.org/10.2139/ssrn.1926700

Tuomas Kosonen (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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