BIP (Economic Policy) Brown Bag Workshop 'Pre-announced VAT Increases and the Sales of Consumer Durables'

Research Cluster

Speaker:Thiess Buttner, University of Nuremberg
Date: Thursday 23 March 2017
Time: 1.30 pm
Location: 3.30 pm

Further details

Co-wrtitten with Boryana Madzharova.

Abstract

The paper analyzes the effects of pre-announced VAT reforms on the time pattern of sales of consumer durables. A theoretical analysis shows that the optimal consumption path gives rise to a substantial increase in the purchases of durables directly before the VAT increase, followed by a considerable drop after the reform which exceeds the initial increase. These predictions are tested utilizing a unique dataset of monthly sales of durable goods, so called white products (washing machines, fridges etc.), in various European countries, many of which have increased the VAT rate in recent years. The results show that the VAT reforms have triggered sales patterns over time broadly in accordance with the theoretical predictions. The analysis finds a strong termporary increase in sales in the month before VAT increase as well as a stronger decline in sales after the tax increase. In the light of the theoretical analysis the latter points to strong intertemporal substitutiion effects in consumption.