19 October 2015

VAT Incidence

France provided economists with a natural experiment when it reduced the value added tax rate on sit down restaurant meals.

The result: Firm owners bear more than 50% of the burden of the VAT in France, while employees bear about 30% of the burden.  Prices (i.e. the consumer part of the burden) changed only a little.

Traditionally, VAT has been assumed to have an economic incidence that matches its nominal incidence on consumers, or to be borne entirely by firms.

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