Abstract
In the vast majority of countries where a value-added tax (VAT) is in force, basic groceries are taxed at reduced rates. The reduced tax rates are intended to ensure the lowest possible prices for those products for consumers, but this does not always happen. The objective of this article is to determine whether the small reduction in the VAT rate on groceries, from 7% to 5%, which took place in January 2011 in Poland, resulted in lower prices for consumers, and the research does not support the conclusion that the government’s reduction of the VAT on basic foodstuffs had that effect. Behavioral economics and psychology can explain the absence of price reductions. The conclusions drawn have important implications for tax policy.
ACKNOWLEDGMENTS
I am grateful to my colleagues from the Corporate Finance Department at the Poznań University of Economics and Business—in particular, to Professor Jan Sobiech, for support and discussion of a preliminary version of the article. I thank ICAFFI participants, for useful remarks provided in Poznań in October 2016. I also wish to convey gratitude to two anonymous reviewers, for their helpful comments and suggestions. I am also obliged to the editor, Josef Brada, for the efficient and friendly editorial process, and to Debra Soled, for final corrections. All errors and omissions are mine.
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Arkadiusz Bernal
Arkadiusz Bernal is at the Corporate Finance Department, Poznań University of Economics and Business, Poznań, Poland.