Ad-valorem tax incidence and after-tax price adjustments: evidence from Brazilian basic basket food

Abstract

We examine price responses to ad-valorem tax changes in the Brazilian food market over the period 1994-2008. In particular, we investigate VAT incidence for ten goods representing basic basket food in 16 states. Our results suggest tax undershifting to retail prices for all goods. However, once tax rates rises and falls are taken into account separately, we also obtain results of tax fullshifting and tax overshifting. We conclude that tax incidence estimative can produce different outcomes depending on the direction of tax rate changes. Finally, our results indicate that food retail price responses to VAT changes are somewhat instantaneous.