VAT rates have been changed multiple times during the past decade in Hungary. We measure the price- and income elasticity of households’ expenditure based on these exogenous effects and the QUAIDS model of demand. We have developed the model further to include the effect of subsistence farming on the elasticities, showing that such activity increases the price-elasticity of food purchases, as expected. We show the estimation results in particular the distribution of the elasticities and the welfare effect of the tax changes. Because both the 2006 and 2009 reforms decreased welfare of the households, we have looked at alternative reforms with the capacity to improve their situation. Among the interventions considered, either as a pure transfer or an extension of public works to low-income unemployed individuals proved to be the best targeted one. Lowering the VAT rate for food and utility costs has a similar effect, but subsidising subsistence farming changes household welfare only mildly. We can reinforce the position that welfare programs that are effective are also expensive.

CSERES-GERGELY Zsombor;  MOLNÁR Gyӧrgy;  SZABÓ Tibor; 

2016-09-15

Közgazdasági Szemle Alapítvány

JRC100704

http://www.kszemle.hu/tartalom/cikk.php?id=1649,    https://publications.jrc.ec.europa.eu/repository/handle/JRC100704,   

10.18414/KSZ.2016.9.901,