Short-run Distributional Effects of VAT Rate Change: Evidence from a consumption tax rate increase in Japan

Author Name David CASHIN  (University of Michigan) /UNAYAMA Takashi  (Faculty Fellow, RIETI)
Creation Date/NO. May 2012 12-E-029
Research Project Issues Faced by Japan's Economy and Economic Policy: Demand, productivity, and sustained growth
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Households will purchase more items than usual prior to a value added tax (VAT) rate increase in order to avoid taxation. Since this type of arbitrage requires resources such as shopping time and storage space, the impacts of tax increases vary across households, which has brought distributional effects in the short-run. Using the case of a consumption tax rate increase in Japan in 1997, we show that households who are non-working, with non-working spouses and residing in larger houses, benefited from more arbitrage. To minimize short-run economic disturbances, step-by-step increases would be useful.