The full, persistent, and symmetric pass-through of a temporary VAT cut

Abstract

We investigate the pass-through of a temporary value-added tax (VAT) cut on selected food products to consumer prices in Portugal. Exploiting a novel data set of daily online prices, we find that the VAT cut was fully transmitted to consumer prices, persisted throughout the policy duration, and prices returned to the pre-implementation trend after reversal. We discuss two potential mechanisms driving this result: the policy’s salience to consumers in a high-inflation environment and the decline in producer prices when implemented. We estimate that the policy reduced the inflation rate by 0.68 percentage points on impact.