Study shows VAT cuts on food fully benefit consumers — with evidence from Portugal, the UK, Spain and France
A recent study by João Quelhas and Tiago Bernardino, PhD students in economics at Stockholm University, offers strong evidence that reducing VAT on food directly lowers consumer prices. Together with co-authors of the study, Ricardo Duque Gabriel and Márcia Silva-Pereira, they examined the impact of a temporary VAT reduction on selected food items in Portugal in 2023. Their findings, published in the Journal of Public Economics, reveal that the VAT cut was entirely passed through to consumers.
This comes as a Japan food Consumption Tax rate cut is being debated, with many instead promoting more targeted welfare support.
By leveraging a unique dataset of daily online food prices, the researchers found that prices dropped immediately when the VAT reduction took effect, stayed lower throughout the policy period, and returned to previous trends once the standard tax rate was reinstated. They attribute this full pass-through to two key factors: the high visibility of the policy change during a time of high inflation, and a simultaneous decrease in producer prices. Their analysis indicates the policy lowered Portugal’s inflation rate by 0.68 percentage points at the time of implementation.
Conflicting conclusions from other countries.
During the inflation spike of 2022, many countries cut VAT on food to alleviate inflationary pressures. But many economists debate its effectiveness. For example, the IMF advises on more targeted welfare support for the most needy only.
Other studies have explored similar tax shifts. In the UK, evidence from the temporary VAT cut during the 2008–2009 financial crisis showed limited pass-through, with retailers passing on roughly 75% of the tax savings to consumers. Meanwhile in France, research on reduced VAT rates for restaurants in 2009 found that only a fraction of the tax benefit translated into lower menu prices, with much of it absorbed by businesses. A study of the Spanish food VAT cuts in 2022 proved relatively successful.
Together, these studies highlight that while VAT cuts can lower consumer prices, the extent depends on market conditions, competition, and the visibility of the tax change. Portugal’s case stands out for demonstrating a rare instance of a full pass-through, offering valuable insights for policymakers considering similar measures.
