Unit sales and price effects of pre-announced consumption tax reforms: micro-level evidence from European VAT

This paper studies the effects of multiple pre-announced consumption tax changes on prices and unit sales of consumer durables (household appliances) utilizing micro-level product data. The identification strategy exploits the contemporaneous trading of exactly the same product in different countries within the EU Common Market. The results show that tax rate changes are fully shifted into prices, but a third of the pass-through occurs before implementation. An anticipated tax rate change causes a temporary change in unit sales shortly before implementation, which is more than offset by adjustments upon and after implementation. Quantitatively, in response to a 1 percentage point increase of the tax rate, unit sales rise by 2.5% on average in the last month before implementation. The permanent effect is a drop in unit sales by about 2% below their original level, implying relatively strong intertemporal substitution effects.