Much Ado about Nothing? Yes and No. - VAT Pass-through to Consumer Prices

Slovakia experienced significant changes in value-added taxation since 2003. This happened in line with the government’s strategy of shifting towards indirect taxation, widely believed to have less harmful effects on economic growth, as well as the need for fiscal consolidation in the aftermath of the crisis. In this study we examine the impact of tax changes on consumer prices. Our findings suggest that the pass-through was strong in the events of tax increases, while the impact on prices was insignificant in cases of VAT reductions. However, the identified absence of the pass-through in the events of tax cuts may be linked to the nature of the studied events including the concurrent VAT increase and reduction in 2003 and 2004 and the narrow item-specific VAT cut in 2008. Going further, we find that the prolonged announcement period of the tax measure before its actual implementation helps smooth out the inflation profile as anticipatory effects are present in the case of VAT increases.