Stimulus Effect of a Value-added Tax Cut: Evidence from the UK Tax Returns Data

Abstract In response to the great recession of 2008, the UK government used a temporary value-added tax rate reduction as its main stimulus policy. From 1 December 2008 to 31 December 2009, the standard-rate of value-added tax was reduced from 17.5 to 15 percent while the existing zero-rate did not change. I use the universe of VAT returns between 2002q1 to 2010q4 to compare changes in sales growth for standard-rated traders to that of zero-rated traders (difference-in-differences). I find an insignificant small impact on sales growth once I allow for heterogeneous effects of the recession either by a) relying solely on post-recession observations or b) controlling for two-digit sector specific recession impacts. Subject to full pass through of the rate cut to consumer prices, a zero effect on sales growth is reflective of a proportionate increase in sales quantity (unit elasticity).