Analysing the VAT cut pass-through in Spain using web-scraped supermarket data and machine learning

Abstract

On 28 December 2022, the Spanish government announced a temporary Value Added Tax (VAT) rate reduction for selected products. VAT rates were cut on 1 January 2023 and are expected to go back to their previous level by mid-2024. Using a web-scraped dataset, we leverage machine learning techniques to classify each product. Then we study the price effects of the temporary VAT rate reduction, covering the daily prices of roughly 10,000 food products sold online by a Spanish supermarket. To identify the causal price effects, we compare the evolution of prices for treated items (that is, subject to the tax policy) against a control group (food items outside the policy’s scope). Our findings indicate that, at the supermarket level, the pass-through was almost complete. We observe differences in the speed of pass-through across different product types.