Determinants of VAT pass-through under imperfect competition: Evidence from Japan

Abstract

This study empirically explores value-added tax (VAT) pass-through using unique point-of-sales (POS) data at supermarkets and drugstores in Japan. The VAT increase in 2014 covers almost all goods and services, with the same increase rate of 3%. Conventional wisdom assumes that all goods and services experience a 3% price increase from full-shifting. I show that the price changes in the month the VAT was increased are diversified, that is, the tax incidences are not uniform. The model estimations indicate that market conditions, such as elasticity and market concentration, determine the extent of tax shifting in accordance with theoretical assumptions. The effectiveness of the imperfect market approach is demonstrated. The evidence from this study implies that distributional equity cannot be attained through rate differentiation.