A briefing note by the Institute of Economic Research (IME) of the General Confederation of Greek Small and Medium-Sized Enterprises (GSEVEE), titled “Extent of the Pass-Through of Changes in VAT Rates to Prices and Impacts on Household Income.”
As noted, the brief draws on the empirical evidence generated by the temporary VAT reductions implemented in the European Union during the 2022–2023 period, as part of measures to address the energy crisis and inflationary pressures. A critical review of 32 empirical studies, covering 69 episodes of VAT changes, reveals significant differences between earlier and more recent periods.
According to the key findings, up until 2020, the average degree of pass-through of VAT reductions to prices stood at approximately 50%. In contrast, more recent studies covering the 2022–2023 period conclude that the pass-through of VAT reductions to consumer prices was nearly complete, ranging from 90% to 100%.
With regard to increases in VAT rates, the note states that the pass-through remains incomplete, with an average rate of 74%. This, as noted, means that businesses often absorb part of the cost increase in order to maintain their market position.
Particular emphasis is placed on small and sole proprietorships, which dominate the Greek economy. As noted, for these businesses, the company’s profit is equivalent to the household’s income. Consequently, the portion of the benefit from a VAT reduction that is not directly passed on to prices is not lost but is indirectly returned to households through self-employment and the labor market.
The IMEGSEVEE argues that in economies with a strong presence of very small businesses, such as the Greek economy, the ultimate benefit to households from a VAT reduction is systematically greater than that reflected solely in the direct pass-through to prices.
At the same time, the note highlights the role of market structure, noting that more competitive markets exhibit a higher degree of pass-through compared to markets with oligopolistic characteristics. According to the analysis, the publicity surrounding a VAT reduction policy also has a positive effect, as does the coordination of action between social partners and the government.
Regarding the redistributive effect of changes in VAT rates, the briefing note concludes that this effect is positive overall, although the across-the-board nature of the reduction limits its effectiveness compared to more targeted income support measures.
SOURCE: APE