Journal of Political Economy

Volume 128, Number 12December 2020

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

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Youssef Benzarti

, 

Dorian Carloni

, 

Jarkko Harju

, and 

Tuomas Kosonen

University of California, Santa Barbara, and National Bureau of Economic ResearchCongressional Budget OfficeVATT Institute for Economic ResearchLabour Institute for Economic Research

Abstract

This paper provides evidence that prices respond significantly more strongly 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 as 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 particularly likely to respond asymmetrically to VAT changes. Fourth, these asymmetric price effects persist several years after VAT changes take place. Fifth, using all VAT changes in the European Union from 1996 to 2015, we find similar levels of asymmetry.