What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes

103 Pages Posted: 25 Sep 2017 Last revised: 1 Mar 2021

See all articles by Youssef Benzarti

Youssef Benzarti

University of California, Los Angeles (UCLA) - Department of Economics

Dorian Carloni

University of California, Berkeley; Congressional Budget Office

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: September 2017

Abstract

This paper shows that prices respond more to increases than to decreases in Value-Added Taxes (VATs). First, using two plausibly exogenous VAT changes, we show that prices respond twice as much to VAT increases than to VAT decreases. Second, we show that this asymmetry results in higher equilibrium profits and markups. Third, we find that firms operating with low profit margins are more likely to respond asymmetrically to the VAT changes than firms operating with high profit margins. Fourth, this asymmetry persists several years after the VAT changes take place. Fifth, using all VAT changes in the European Union from 1996 to 2015, we find similar levels of asymmetry.

Suggested Citation

Benzarti, Youssef and Carloni, Dorian and Harju, Jarkko and Kosonen, Tuomas, What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes (September 2017). NBER Working Paper No. w23849, Available at SSRN: https://ssrn.com/abstract=3042409

Youssef Benzarti (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Dorian Carloni

University of California, Berkeley ( email )

525 F. Haas School of Business
Berkeley, CA
United States

Congressional Budget Office ( email )

Washington, DC
United States

Jarkko Harju

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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