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Speaker:
Santiago Garriga (Universidad Nacional de La Plata)

Mandating Tax Incidence: Using Price Controls to Better Target Tax Cuts

^{(with Dario Tortarolo and Youssef Benzarti)}

Abstract:
This paper estimates the price and quantity effects of a new policy tool aimed at alleviating inflation and ensuring low-income households can still afford basic necessities in Argentina: a large, temporary VAT cut on food essentials coupled with a pre-existing price monitoring information system and price controls that dictate how VAT changes are shared between firms and consumers. Our findings show that governments can fine-tune VAT pass-through to prices with other complementary tools: VAT cuts combined with price controls/monitoring in grocery stores are substantially more effective at reducing prices than VAT cuts alone. This experience suggests that tax incidence is not an immutable parameter and it highlights the importance of enforcement when mandating incidence and stimulating demand.