Who pays taxes on basic foodstuffs? Evidence from broadening the VAT base


We exploit the introduction of a 5% VAT on very essential food products (like fresh milk, coffee, yogurt, cheese) that occurred when an EU member state had to harmonize its VAT legislation with the EU VAT legislation. Preceding this reform, there was a removal of the zero VAT rate and imposition of 5% VAT rate on other food items that were considered less essential (juices, bottled water). We adopt a difference-in-difference approach as the price data support the common trends identifying assumption. On average, the tax was shifted fully to the consumer within the first month after the reform. However, there are differences even across seemingly related goods as some of them experienced overshifting of the pass through effect. The prices of goods in the control group did not change. These estimates are robust to alternative specifications and can be useful to other countries considering to broaden their VAT base by taxing basic groceries.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5


  1. 1.

    The poorest 10% of the households spent 35.32% of their mean total expenditure on food (Family Expenditure Survey 2009).

  2. 2.

    For example, our control group includes mineral waters and juices but does not include soft drinks that were subject to the standard VAT rate of 15% before and after the reform. In Benedek et al. (2015), mineral waters, soft drinks, fruit and vegetable juices are included in the same expenditure category. Another example is that our treatment group includes sugar but does not include chocolates that were subject to a VAT rate of 5% before the reform. In Benedek et al. (2015), sugar and chocolates are in the same expenditure category.

  3. 3.

    Kosonen (2015) exploited the January 2007 VAT cut and found that firms and consumers divided the benefit from the tax reduction roughly equally.

  4. 4.

    The sales tax legislation was passed and put into effect on 1st July, 1992. By the beginning of 2001, the harmonization of the Cypriot legislation with the European acquis was achieved to a great extent and specific regulations were implemented on 1st February 2002. Details of the Cypriot VAT legislation can be found at the following government website (retrieved February, 2020): https://www.mof.gov.cy/mof/TAX/taxdep.nsf/All/F8639CAECF1C21A8C22582090041B11F?OpenDocument.

  5. 5.

    The Herfindahl–Hirschman index (HHI) is an acceptable measure of market concentration. It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. The index can range from close to zero to 10,000 (monopoly).

  6. 6.

    We do not have evidence that indicates to what extent this additional information affects the salience of the price of these key commodities relative to others. However, the prices posted by the Observatory are sometimes in the news, in particular during big holidays when there are family gatherings and celebrations with food consumption.

  7. 7.

    The retail stores (supermarkets) include Athienitis, Alphamega, Carrefour, Debenhams, E&S, Kokkinos, Karseras, Metro, Orfanides, Sarris and Stelios.

  8. 8.

    This information can be found on the website of the Statistical Service of Cyprus (retrieved February, 2020): https://www.mof.gov.cy/mof/cystat/statistics.nsf/All/271634F644F6D66BC2257D5F002D89CD/$file/WHOLESALE_AND_RETAIL-2011-270913.pdf?OpenElement

  9. 9.

    These include the three main dairy companies (Charalambides Ltd, Kristis Ltd and Pittas Dairy Industry Ltd), two main manufacturers of traditional cypriot coffee (G. Charalambous Ltd, Laiko Cosmos Trading Ltd), leading manufacturer of pasta (Mitsides) and main manufacturers of juices and bottled water (Kean Ltd, Lanitis Group and Fotiades Group).

  10. 10.

    The market share for fresh milk of Charalambides and Christis is about 62% and Lanitis about 31%.

  11. 11.

    G. Charalambous Ltd satisfies about 40% of the market for traditional coffee.

  12. 12.

    In Eq. (2), the perfectly competitive case is a special case of equation when demand elasticity is infinite.

  13. 13.

    We also included variables that capture changes in the costs of production of these goods, such as electricity, wages and barley (for macaroni). These variables are highly correlated with monthly dummies and the causal estimates do not change.

  14. 14.

    Since the dependent variable is the first difference of ln price, the parameter estimates of the June 2010 monthly dummy cannot be estimated in the case of the shorter time series data and the parameter estimates of the January 2010 monthly dummies cannot be estimated in the case of the longer time series data. The reference in both data sets is July 2010 control group.

  15. 15.

    Other types of cheeses are expected, to some extent, to be substitutes of halloumi cheese. In 2011, per capita consumption of all other cheeses (domestically produced and imported) was double the per capita consumption of halloumi cheese.

  16. 16.

    Another implication of this type of tax, noted by Atkinson (2012), is that the within household distribution of income may also be affected since this policy change may leave worse off those in the household who do the grocery shopping and, consequently, have an effect on gender equality.


  1. Alm, J., Sennoga, E., & Skidmore, M. (2009). Perfect competition, urbanization and tax incidence in the retail gasonie market. Economic Inquiry, 47(1), 118–134.

    Article  Google Scholar 

  2. Angrist, J. D., & Krueger, A. B. (1999). Empirical strategies in labor economics. In D. Card, & O. Ashenfelter (Eds.), Handbook of labor economics (Chap. 23, Vol. 3, pp. 1277–1366). North Holland.

  3. Atkinson, T. (2012). The Mirrlees review and the state of public economics. Journal of Economic Literature, 50(3), 770–780.

    Article  Google Scholar 

  4. Benedek, D., Mooij, R. D., Keen, M., & Wingender, P. (2015). Estimating VAT pass through. IMF Working Paper, WP/15/214.

  5. Benzarti, Y., Carloni, D., Harju, J., & Kosonen, T. (2019). What goes up may not come down: Asymmetric incidence of value-added taxes. National Bureau of Economic Research (NBER), Working Paper 23849.

  6. Berardi, N., Sevestre, P., Tepout, M. & Vigneron, A. (2012). The impact of a ’Soda Tax’ on prices. Evidence from French Micro Data. Banque de France Working Paper No. 415.

  7. Bergman, U. M., & Hansen, N. L. (2010). Are excise taxes on beverages fully passed through to prices? The Danish Evidence. Working Paper.

  8. Besley, T. (1989). Commodity taxation and imperfect competition: A note on the effects of entry. Journal of Public Economics, 40(3), 359–367.

    Article  Google Scholar 

  9. Besley, T. J., & Rosen, H. S. (1999). Sales taxes and prices: An empirical analysis. National Tax Journal, 52(2), 157–178.

    Google Scholar 

  10. Brownlee, O., & Perry, G. (1967). The effects of the 1965 Federal excise tax reductions on prices. National Tax Journal, 20(3), 235–249.

    Google Scholar 

  11. Carbonnier, C. (2007). Who pays sales taxes? Evidence from French VAT reforms, 1987–1999. Journal of Public Economics, 91(5–6), 1219–1229.

    Article  Google Scholar 

  12. Cawley, J., & Frisvold, D. E. (2017). The pass-through of taxes on Sugar-Sweetened Beverages to Retail Prices: The case of Berkeley California. Journal of Policy Analysis and Management, 36(2), 303–326.

    Article  Google Scholar 

  13. Crawford, I., Keen, M., & Smith, S. (2010). Value added tax and excises. In J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, M. Johnson, J. Myles, & J. Poterba (Eds.), Dimensions of tax design. The Mirrlees review (pp. 275–422). New York: Oxford University Press Inc., chap. 4.

    Google Scholar 

  14. DeCicca, P., Kenkel, D., & Liu, F. (2013). Who pays cigarette Taxes? The impact of consumer price search. Review of Economics and Statistics, 95(2), 516–529.

    Article  Google Scholar 

  15. Delipalla, S., & Keen, M. (1992). The comparison between ad valorem and specific taxation under imperfect competition. Journal of Public Economics, 49(3), 351–367.

    Article  Google Scholar 

  16. Delipalla, S., & O’Donnell, O. (2001). Estimating tax incidence, market power and market conduct: The European cigarette industry. International Journal of Industrial Organization, 19(6), 885–908.

    Article  Google Scholar 

  17. European Commission. (2014). The economic impact of modern retail on choice and innovation in the EU food sector. Retrieved July, 2019 from http://ec.europa.eu/competition/publications/KD0214955ENN.pdf.

  18. European Commission. (2018). Vat rates applied in the member states of the European Union, situation at 1st January.

  19. European Competition Network. (2012). ECN activities in the food sector.. Retrieved July, 2019 from http://ec.europa.eu/competition/ecn/food_report_en.pdf.

  20. Evans, W., Ringel, J., & Stech, D. (1999). Tobacco taxes and public policy to discourage smoking. In J. Poterba (Ed.), Tax policy and the economy (13th ed.). Cambridge: MIT Press.

    Google Scholar 

  21. Fullerton, D., & Metcalf, G. E. (2002). Tax incidence. In A. Auerbach, & M. Feldstein (Eds.), Handbook of public economics (Vol. 4, chapter 29, pp. 1788–1872). Amsterdan: Elsevier Publishing Co.

  22. Grogger, J. (2015). Soda taxes and the prices of sodas and other drinks: Evidence from Mexico. NBER Working Paper 21197.

  23. Hall, R. E. (1988). The relationship between price and marginal cost in the US industry. Journal of Political Economy, 96(5), 921–947.

    Article  Google Scholar 

  24. Hanson, A., & Sullivan, R. (2009). The incidence of tobacco taxation: Evidence from geographic micro-level data. National Tax Journal, 62(4), 677–98.

    Article  Google Scholar 

  25. Harding, M., Leibtag, E., & Lovenheim, M. (2012). The heterogeneous geographic and socioeconomic incidence of cigarette taxes: Evidence from Nielsen Homescan data. American Economic Journal, 4, 169–198.

    Google Scholar 

  26. Johnson, T. R. (1978). Additional evidence on the effects of alternative taxes on cigarette prices. Journal of Political Economy, 86, 325–328.

    Article  Google Scholar 

  27. Katz, M., & Rosen, H. S. (1985). Tax analysis in an oligopoly model. Public Finance Quarterly, 13(1), 3–19.

    Article  Google Scholar 

  28. Keeler, T. E., Hu, Teh-wei, Barnett, P. G., Manning, W. G., & Sung, H. Y. (1996). Do cigarette producers price-discriminate by state? An empirical analysis of local cigarette pricing and taxation. Journal of Health Economics, 15(4), 499–512.

    Article  Google Scholar 

  29. Kenkel, D. S. (2005). Are alcohol tax hikes fully passed through to prices? Evidence from Alaska. American Economic Review Papers and Proceedings, 95, 273–277.

    Article  Google Scholar 

  30. Kosonen, T. (2015). More and cheaper haircuts after VAT cut? On the efficiency and incidence of service sector consumption taxes. Journal of Public Economics, 131, 87–100.

    Article  Google Scholar 

  31. Kotlikoff, L., & Summers, L. (1987). Theory of tax incidence. In Alan Auerbach & Martin Feldstein (Eds.), Handbook of public economics. Amsterdam: North-Holland.

    Google Scholar 

  32. Leyaro, V., Morrissey, O., & Owens, T. (2010). Food prices, tax reforms and consumer welfare in Tanzania 1991–2007. International Tax and Public Finance, 17, 430–450.

    Article  Google Scholar 

  33. Liberati, P. (2001). The distributional effects of indirect tax changes in Italy. International Tax and Public Finance, 8, 27–51.

    Article  Google Scholar 

  34. Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, S., et al. (Eds.). (2011). Tax by design: The Mirrlees review. Oxford: Oxford University Press.

    Google Scholar 

  35. Politi, R. B., & Mattos, E. (2011). As-valorem tax incidence and after-tax price adjustments: Evidence from Brazilian basic basket food. Canadian Journal of Economics, 44(4), 1438–1470.

    Article  Google Scholar 

  36. Poterba, J. M. (1996). Retail price reactions to changes in state and local sale taxes. National Tax Journal, 49(2), 165–176.

    Google Scholar 

  37. Seade, J. (1985). Profitable cost increases and the shifting of taxation: Equilibrium responses of market to oligopoly. University of Warwick Discussion Paper.

  38. Stern, N. H. (1987). The effects of taxation, price control and government contracts in oligopoly. Journal of Public Economics, 32(2), 133–158.

    Article  Google Scholar 

  39. Tiffin, R., Balcombe, K., Matthew Salois, K., & Kehlbacher, A. (2011). Estimating food an drink elasticities. Food and drink elasticities report. Department of Environment, Food and Rural Affairs. Retrieved February, 2020 from https://www.gov.uk/government/publications/food-and-drink-elasticities.

  40. Young, D. J., & Bielinska-Kwapisz, A. (2002). Alcohol taxes and beverage prices. National Tax Journal, 55(1), 57–73.

    Article  Google Scholar 

Download references


We are very grateful to the Editor-in-Chief and two anonymous referees for their very useful comments and suggestions. Also, we would like to thank Theofanis Mamuneas, Federico Perali, Nikos Theodoropoulos and Panos Tsakloglou for helpful comments and suggestions. We also would like to thank the University of Cyprus for financial support. We are solely responsible for the interpretation of the data and all errors.

Author information



Corresponding author

Correspondence to Panayiota Lyssiotou.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.



See Tables 1, 2, 3, 4, 5 and Figs. 6, 7.

Table 1 Prices of brand food products in treatment and control groups June 2010–June 2011
Table 2 Monthly prices of food products in treatment and control group June 2010–June 2011
Table 3 First difference in monthly price of product categories in treatment and control groups June 2010–June 2011
Table 4 Parameter estimates with and without VAT policy reform
Table 5 Parameter estimates for different treated food categories with VAT reform intervention
Fig. 6

Prices of treated product categories versus control group

Fig. 7

Prices of treated product categories versus control group

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Lyssiotou, P., Savva, E. Who pays taxes on basic foodstuffs? Evidence from broadening the VAT base. Int Tax Public Finance 28, 212–247 (2021). https://doi.org/10.1007/s10797-020-09605-6

Download citation


  • Commodity taxation
  • Tax burden
  • Tax incidence
  • Pass through
  • Tax harmonization

JEL Classification

  • H22
  • H32
  • D4