Incidence and Distributional Effects of Value Added Taxes

This article examines the incidence and distributional effects of value added taxes (VAT). A sharp change in the VAT policy on food in Norway is exploited. My findings suggest that taxes levied on food are completely shifted to consumer prices, while there is little spill-over effects to most other goods. To understand the distributional effects of the reform, one uses expenditure data and estimate the compensating variation of the tax induces price changes. I find that lowering the VAT on food attenuates inequality in consumer welfare, in part because households adjust their spending patterns in response to the price change.