Ingvil Gaarder: Incidence and Distributional Effects of Value Added Taxes
OFS seminar. Ingvil Gaarder is an Assistant Professor at the University of Chicago. She will present a paper entitled "Incidence and Distributional Effects of Value Added Taxes".
Foto: University of Chicago
In this paper, we examine the incidence and distributional effects of VATin a setting with plausibly exogenous variation in tax rates. The context of our study is a sharp change in the VAT policy on food items in Norway. Using a regression discontinuity design, we examine the direct impact of the policy change on the consumer prices of food items as well as any cross-price effects on other goods. Our estimates suggest that taxes levied on food items are completely shifted to consumer prices, whereas the pricing of most other goods does not seem to be materially affected. To understand the distributional effects of the VAT reform, we use expenditure data and estimate the compensating variation of the tax induced price changes. We find that lowering the VAT on food attenuates inequality in consumer welfare, in part because households adjust their spending patterns in response to the price changes. By comparison, the usual first-order approximation of the distributional effects, which ignores behavioral responses, seriously understates the redistributive nature of the VAT reform.