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.
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The poorest 10% of the households spent 35.32% of their mean total expenditure on food (Family Expenditure Survey 2009).
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.
Kosonen (2015) exploited the January 2007 VAT cut and found that firms and consumers divided the benefit from the tax reduction roughly equally.
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.
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).
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.
The retail stores (supermarkets) include Athienitis, Alphamega, Carrefour, Debenhams, E&S, Kokkinos, Karseras, Metro, Orfanides, Sarris and Stelios.
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
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).
The market share for fresh milk of Charalambides and Christis is about 62% and Lanitis about 31%.
G. Charalambous Ltd satisfies about 40% of the market for traditional coffee.
In Eq. (2), the perfectly competitive case is a special case of equation when demand elasticity is infinite.
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.
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.
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.
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.
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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.
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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
- Commodity taxation
- Tax burden
- Tax incidence
- Pass through
- Tax harmonization