Our analysis of the reduction in VAT for restaurant and catering services shows positive effects on turnover, employments, total wages, gross profit margins and net entry of firms. It is clear that the firms have used the VAT reduction in more ways than lowering prices.
In this study we investigate the impact of the VAT reform for restaurant and catering services that took place in Sweden on January 1, 2012. The aim of this reform was to increase long-term employment in Sweden. Growth Analysis was commissioned to evaluate the effects of this reform from the perspective of firms. This PM serves as a foundation for this commission’s final report Reduced VAT on restaurant and catering services – final report.
Evaluating the effects of a VAT reduction that includes all firms in an industry is a challenge and difficult methodologically due to the lack of a counterfactual outcome. In this study, we constructed our counterfactual using a synthetic control group (SCG) approach, which is a data-driven approach that only relies to a small extent on subjective choices. Unlike previous studies we assume that the VAT reform can affect each part in the profit function and also influence entry and exit in the market. We do the analysis on industry level by aggregating firm level data.
The VAT reduction had a positive and significant effect on turnover, profit margins and net entry of firms. The average yearly effect is estimated to be 5.6, 1.25 and 1.6 percentage points respectively. These results are significant at the 5 % level. The average yearly effect on total wages and employment lies at 4.9 and 5.0 percentage points respectively and is significant at the 10 % level. The effects tend to decline over time, with exception for net entry of firms.
Although estimating the exact effects of a reform remains difficult, our results are robust to sensitivity analyses. Overall, our results point to better performance for the restaurant industry compared to what it would have been in the absence of the reform.
Impact of the VAT reform on Swedish restaurants – a synthetic control group approach