Stimulus Effect of a Value-added Tax Cut: Evidence from the UK Tax Returns Data

Vesal, Mohammad (2017): Stimulus Effect of a Value-added Tax Cut: Evidence from the UK Tax Returns Data.

Abstract

Abstract In response to the great recession of 2008, the UK government used a temporary value-added tax rate reduction as its main stimulus policy. From 1 December 2008 to 31 December 2009, the standard-rate of value-added tax was reduced from 17.5 to 15 percent while the existing zero-rate did not change. I use the universe of VAT returns between 2002q1 to 2010q4 to compare changes in sales growth for standard-rated traders to that of zero-rated traders (difference-in-differences). I find an insignificant small impact on sales growth once I allow for heterogeneous effects of the recession either by a) relying solely on post-recession observations or b) controlling for two-digit sector specific recession impacts. Subject to full pass through of the rate cut to consumer prices, a zero effect on sales growth is reflective of a proportionate increase in sales quantity (unit elasticity).

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal stimulus, value-added tax, standard-rate cut, tax returns data
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm

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