Does VAT Cut Appear on the Menu? – The Consumer Price Impact of Hungarian VAT Decreases of 2016–2017

Abstract

To understand the economic impacts of VAT changes, the passthrough to consumer prices should be analysed. The main objective of the study is to examine passthrough with the rarely used method of synthetic controls for Hungarian VAT changes in 2016–2017. Synthetic price indices are created from the price indices of the same consumer expenditure categories of different European countries. The study finds almost full passthrough in case of pork and chicken, while the passthrough is only partial for fresh milk and eggs. The primarily analysed Hungarian VAT changes of 2016–2017 have not been reflected in the consumer prices of the restaurant sector at all. The price impacts for food items are in line with the experiences of the Romanian decrease of VAT in 2015. Analysing the earlier Hungarian and international passthrough rates of the restaurant sector with the synthetic control method, we can state that this sector is characterized by strong asymmetric passthrough. VAT increases are fully transferred to consumer prices while this is not the case for VAT decreases.