Restaurant VAT Cut: Cheaper Meal and More Service?

Government Institute for Economic Research Working Papers No. 52

50 Pages Posted: 2 Jan 2014

See all articles by Jarkko Harju

Jarkko Harju

Government of the Republic of Finland - VATT Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Date Written: October 9, 2013

Abstract

This paper provides causally plausible estimates of the effects of consumption taxes in a service sector on prices and demand for restaurant services. We utilize a large VAT reform affecting restaurant meals, where the VAT rate was cut from 22% to 13% in 2010 in Finland. By comparing with restaurants in neighboring countries and other related sectors in Finland, the reform offers a natural experimental approach. The results indicate that restaurants reduced their prices on average by only 2%, which equals roughly a quarter of the full pass-through. Remarkably, at the same time a majority of restaurants did not reduce their prices at all and a non-trivial fraction of restaurants reduced their prices by exactly the full pass-through. Larger restaurants reduced their prices more often than smaller restaurants. We do not observe any increases in the quantity of services sold or in wage sums paid to employees. Furthermore, there are no changes in mediumterm entry and exit due to the reform.

Keywords: VAT reform, restaurants, tax incidence

JEL Classification: H220, H320, H210

Suggested Citation

Harju, Jarkko and Kosonen, Tuomas, Restaurant VAT Cut: Cheaper Meal and More Service? (October 9, 2013). Government Institute for Economic Research Working Papers No. 52, Available at SSRN: https://ssrn.com/abstract=2338434 or http://dx.doi.org/10.2139/ssrn.2338434

Jarkko Harju (Contact Author)

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Tuomas Kosonen

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

P.O. Box 54
FIN-00014 Helsinki
Finland

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