Figures and tables in The distributional impact of VAT reduction for food in Hungary: Results from a Hungarian microsimulation model

Abstract

In this paper we illustrate how the incorporation of behavioural responses and dynamic effects alters the conclusions of static household microsimulation models on the distributional impacts of economic policies. Based on Hungary’s Household Budget and Living Conditions Survey, we model household consumption using the demand system approach of Creedy, 1998. This method makes it possible to obtain reasonable price elasticity estimates of consumption from cross-sectional data by combining them with Frisch-parameter values obtained from cross-country studies. With this consumption module, we simulate the distributional impacts of a hypothetical food VAT rate change in Hungary and show how the static and behavioural impact estimates differ according to income decile. We examine the sensitivity of our results to the choice of the country-level Frisch-parameter and to a realistic allowance for household-level variation in the Frisch-parameter.

This article contains 5 figures and 9 tables.

Figures

**Figure 1.** Standard VAT rates in the OECD countries (%).

**Figure 2.** Change in VAT payments as a result of food VAT reduction by household income decile (decile 1 with the lowest income).

**Figure 3.** Mean and 10% and 90% quantiles of the change in VAT payments by household income decile (decile 1 with the lowest income).

**Figure 4.** Pre- and post-reform VAT burdens by household income decile (decile 1 with the lowest income).

**Figure A.1.** Dynamic labour market module.

Tables

Table 1. Average product shares, expenditure elasticities and own price elasticities for product categories.

		Expenditure elasticity	Own price elasticity
	Product share	(η_i)	(η_ii)
Food and non-alcoholic beverages	0.226	0.77	−0.48
Alcoholic beverages	0.009	(1.09)	(−0.55)
Tobacco	0.023	(0.58)	(−0.30)
Clothing and footwear	0.042	(1.31)	(−0.68)
Water, electricity, gas and other fuels	0.201	0.37	−0.24
Rents	0.011	1.64	−0.83
Household services	0.097	0.79	−0.44
Health	0.055	1.02	−0.53
Private transport	0.055	1.05	−0.56
Public transport	0.016	1.35	−0.68
Communications	0.066	0.78	−0.42
Recreation and culture	0.047	1.30	−0.67
Education	0.006	(1.59)	(−0.80)
Restaurants and hotels	0.030	(1.69)	(−0.86)
Other goods and services	0.060	1.61	−0.83
Durable goods	0.056	(1.79)	(−0.91)

Source: Authors’ calculations based on HKÉF for 2011.

Notes: Parentheses indicate product categories for which the expenditure parameter estimates were not significant in the consumption equations (Table B.1 in the Appendix) so they cannot be measured reliably.

Table 2. A summary of the VAT rate change in the examined scenario.

Product category	VAT current	VAT in the scenario
Food (Tier 1)	18%	0%
Food (Tier 2)	27%	5%
Other goods (Tier 1)	18%	18%
Other goods (Tier 2)	27%	27%

Source: Operative law on VAT in Hungary.

Table 3. Changes in real consumption by product categories as a result of the reduction of food VAT rate.

Product category	Change in real consumption (%)
Food and non-alcoholic beverages	9.0%
Alcoholic beverages	2.7%
Tobacco	2.0%
Clothing and footwear	2.8%
Water, electricity, gas and other fuels	1.4%
Rents	2.8%
Household services	2.1%
Health	2.5%
Private transport	2.2%
Public transport	2.8%
Communications	2.0%
Recreation and culture	2.7%
Education	2.5%
Restaurants and hotels	2.6%
Other goods and services	2.4%
Durable consumption goods	2.8%

Source: Authors’ calculations with the ECONS-TAX microsimulation model.

Table 4. Changes in VAT payment by decile using different country-level constant Frisch parameters.

	Static scenario	Behavioural scenarios
−1/ξ		0.25	0.4	0.5	0.6	0.75
ξ		−4.0	−2.5	−2.0	−1.67	−1.33
Food price elasticity		−0.32	−0.41	−0.48	−0.55	−0.65
Income Decile	Change in VAT payment (thousand HUF)
1	−57.3	−50.3	−51.1	−51.6	−52.2	−53.0
2	−55.1	−48.8	−49.5	−50.0	−50.5	−51.2
3	−54.8	−48.6	−49.3	−49.8	−50.3	−51.0
4	−60.0	−53.5	−54.2	−54.7	−55.2	−56.0
5	−64.8	−57.8	−58.6	−59.1	−59.6	−60.5
6	−67.3	−59.9	−60.7	−61.3	−61.8	−62.7
7	−75.2	−66.8	−67.7	−68.4	−69.0	−70.0
8	−79.1	−70.0	−71.0	−71.7	−72.4	−73.4
9	−85.3	−75.7	−76.7	−77.5	−78.2	−79.3
10	−98.2	−86.7	−88.0	−88.8	−89.7	−91.0
Total	−69.7	−61.8	−62.7	−63.3	−63.9	−64.8

Source: Authors’ calculations with the ECONS-TAX microsimulation model.

Table 5. Changes in VAT payment by decile using different household-specific Frisch parameters.

Average value of −1/ξ	0.5	0.5	0.5
Income semi-elasticity of −1/ξ	0.00	0.10	0.20
Average food price elasticity	−0.48	−0.48	−0.48
5% quantile of food price elasticity	−0.48	−0.54	−0.61
95% quantile of food price elasticity	−0.48	−0.42	−0.36
Income Decile	Change in VAT payment (thousand HUF)
1	−51.6	−52.0	−51.7
2	−50.0	−49.8	−49.6
3	−49.8	−49.7	−49.5
4	−54.7	−54.7	−54.6
5	−59.1	−59.1	−59.1
6	−61.3	−61.4	−61.4
7	−68.4	−68.5	−68.7
8	−71.7	−72.0	−72.3
9	−77.5	−77.9	−78.4
10	−88.8	−89.9	−90.9
Total	−63.3	−63.5	−63.6

Source: Authors’ calculations with the ECONS-TAX microsimulation.

Table B.1. Parameter estimates of the expenditure share equations.

Share of product category	Av. of variable	Food and non-alc. beverages	Alcoholic beverages	Tobacco	Clothing and footwear	Water and energy	Rents	Household services	Health
Log expenditure	14.3	0.300***	−0.0152	−0.0287	0.0562*	−0.255***	0.101***	0.153***	0.0996***
Log expenditure	(0.536)	(0.0519)	(0.0135)	(0.0236)	(0.0297)	(0.0536)	(0.0188)	(0.0338)	(0.0342)
Log expenditure squared	206.0	−0.0119***	0.000552	0.000701	−0.00150	0.00513***	−0.00318***	−0.00589***	−0.00340***
Log expenditure squared	(15.4)	(0.00178)	(0.000459)	(0.000803)	(0.00104)	(0.00184)	(0.000640)	(0.00116)	(0.00117)
Household type (baseline = no retired person, no couple, no child in the household) (average = 0.179, standard deviation = 0.383 for baseline variable)
Retired: no; couple: no; child: yes	0.032	0.0132**	−0.00457***	−0.00422**	0.00959***	0.0167***	−0.00896**	0.00197	−0.00683***
Retired: no; couple: no; child: yes	(0.176)	(0.00603)	(0.000761)	(0.00204)	(0.00283)	(0.00464)	(0.00386)	(0.00364)	(0.00239)
Retired: no; couple: yes; child: no	0.201	0.0338***	−0.00107	−1.58e-05	−0.00124	0.0210***	−0.00662***	−0.00494***	0.00865***
Retired: no; couple: yes; child: no	(0.401)	(0.00311)	(0.000731)	(0.00141)	(0.00145)	(0.00245)	(0.00208)	(0.00184)	(0.00156)
Retired: no; couple: yes; child: yes	0.172	0.0198***	−0.00383***	−0.00205	0.00466*	0.0261***	−0.0128***	−0.00305	0.00972***
Retired: no; couple: yes; child: yes	(0.377)	(0.00509)	(0.000867)	(0.00196)	(0.00243)	(0.00356)	(0.00312)	(0.00263)	(0.00203)
Retired: yes; couple: no; child: no	0.210	−0.00967**	−0.00137	−0.00111	−0.00346*	0.00610	−0.00950***	−0.00183	0.00970***
Retired: yes; couple: no; child: no	(0.408)	(0.00461)	(0.000984)	(0.00157)	(0.00179)	(0.00380)	(0.00203)	(0.00298)	(0.00323)
Retired: yes; couple: no; child: yes	0.00458	0.0317**	−0.00624***	−0.00652	−0.000390	0.0282***	−0.0159***	0.00924	0.0269***
Retired: yes; couple: no; child: yes	(0.0675)	(0.0136)	(0.00157)	(0.00426)	(0.00516)	(0.0105)	(0.00531)	(0.00994)	(0.00670)
Retired: yes; couple: yes; child: no	0.181	0.0159***	−0.000923	0.00106	−0.00380	0.0248***	−0.0136***	−0.0116***	0.0191***
Retired: yes; couple: yes; child: no	(0.385)	(0.00609)	(0.00138)	(0.00218)	(0.00269)	(0.00482)	(0.00226)	(0.00373)	(0.00408)
Retired: yes; couple: yes; child: yes	0.0204	0.0111	−0.00433***	−0.00115	−0.000883	0.0395***	−0.0134***	−0.0132***	0.0264***
Retired: yes; couple: yes; child: yes	(0.141)	(0.00817)	(0.00144)	(0.00300)	(0.00376)	(0.00608)	(0.00373)	(0.00458)	(0.00472)
Number of children (0-15 years)	0.370	0.0227***	−0.000507	−0.000336	−0.000577	0.00377**	−0.00302**	−0.000199	−0.00215***
Number of children (0-15 years)	(0.785)	(0.00241)	(0.000315)	(0.000905)	(0.00110)	(0.00154)	(0.00134)	(0.00116)	(0.000810)
Number of retired people	0.536	0.0118***	0.000843	−0.000554	0.000522	0.00372	−0.00103	0.00754***	−0.00186
Number of retired people	(0.703)	(0.00358)	(0.000794)	(0.00111)	(0.00148)	(0.00277)	(0.00102)	(0.00223)	(0.00251)
Number of earners	0.938	0.000274	−0.000421*	−0.00128**	0.00492***	0.00700***	−0.00268***	0.000789	−0.00824***
Number of earners	(0.949)	(0.00136)	(0.000231)	(0.000553)	(0.000605)	(0.00101)	(0.000608)	(0.000731)	(0.000676)
Cigarette smoker in the household	0.379	−0.00727***	0.00273***	0.0594***	−0.00315***	−0.00654***	0.00252**	−0.00477***	−0.00592***
Cigarette smoker in the household	(0.485)	(0.00177)	(0.000382)	(0.000786)	(0.000805)	(0.00142)	(0.000987)	(0.00108)	(0.00103)
Car in the household	0.461	−0.0335***	−0.000903**	−0.00437***	−0.00244***	0.000899	−0.0130***	−0.0136***	−0.00825***
Car in the household	(0.498)	(0.00202)	(0.000389)	(0.000705)	(0.000928)	(0.00153)	(0.00114)	(0.00122)	(0.00116)
Household head
Female	0.472	−0.00450**	−0.00449***	−0.00244***	−0.00542***	0.00663***	−0.00212**	0.00607***	0.00591***
Female	(0.499)	(0.00190)	(0.000445)	(0.000768)	(0.000893)	(0.00151)	(0.00107)	(0.00115)	(0.00111)
Standardised age (in 10 years) (standardized to 50 years)	0.483	0.00730***	0.000656**	−0.000905	−0.00515***	0.00844***	−0.00389***	0.00295***	0.00816***
Standardised age (in 10 years) (standardized to 50 years)	(1.45)	(0.00173)	(0.000330)	(0.000671)	(0.000747)	(0.00134)	(0.00107)	(0.000977)	(0.000889)
Standardized age squared	2.33	−0.00308***	−0.000185*	−0.000984***	0.000189	−0.00269***	0.00369***	0.000274	0.00282***
Standardized age squared	(2.50)	(0.000544)	(9.53e-05)	(0.000198)	(0.000253)	(0.000418)	(0.000465)	(0.000299)	(0.000278)
Standardized age on the third power	2.83	−0.000518*	−0.000123**	5.58e-05	2.76e-06	−3.97e-05	−0.000912***	−0.000161	0.000943***
Standardized age on the third power	(8.08)	(0.000298)	(5.28e-05)	(0.000104)	(0.000127)	(0.000232)	(0.000219)	(0.000168)	(0.000165)
Level of education of household head (baseline = never attended school) (average = 0.00099, standard deviation = 0.0315 for baseline variable)
Less than 8 classes in primary school	0.0392	−0.0711	0.00135	−0.00153	0.00735*	0.0719***	−0.0248	0.0320*	−0.0280
Less than 8 classes in primary school	(0.194)	(0.0466)	(0.00401)	(0.0150)	(0.00400)	(0.0264)	(0.0192)	(0.0169)	(0.0266)
8 to 10 years of primary school	0.198	−0.0864*	−7.37e-05	−0.00123	0.00388	0.0680***	−0.0253	0.0395**	−0.0216
8 to 10 years of primary school	(0.399)	(0.0463)	(0.00392)	(0.0150)	(0.00371)	(0.0261)	(0.0191)	(0.0166)	(0.0263)
Lower secondary education	0.321	−0.110**	0.000610	−0.00363	0.000977	0.0688***	−0.0238	0.0520***	−0.0220
Lower secondary education	(0.467)	(0.0462)	(0.00392)	(0.0150)	(0.00370)	(0.0261)	(0.0191)	(0.0166)	(0.0263)
Secondary education	0.133	−0.115**	0.00114	−0.00468	0.00356	0.0597**	−0.0251	0.0569***	−0.0282
Secondary education	(0.340)	(0.0463)	(0.00393)	(0.0150)	(0.00377)	(0.0261)	(0.0191)	(0.0167)	(0.0263)
Upper secondary education	0.0778	−0.118**	0.000149	−0.00606	0.00106	0.0598**	−0.0210	0.0524***	−0.0281
Upper secondary education	(0.268)	(0.0463)	(0.00394)	(0.0150)	(0.00384)	(0.0262)	(0.0192)	(0.0167)	(0.0264)
Post-secondary non-tertiary education	0.0408	−0.117**	0.00307	−0.00555	−0.00266	0.0501*	−0.0217	0.0549***	−0.0215
Post-secondary non-tertiary education	(0.198)	(0.0464)	(0.00399)	(0.0150)	(0.00399)	(0.0262)	(0.0193)	(0.0168)	(0.0265)
Adult school	0.0122	−0.124***	−0.000219	−0.00888	0.00762	0.0564**	−0.0294	0.0619***	−0.0222
Adult school	(0.110)	(0.0466)	(0.00404)	(0.0151)	(0.00544)	(0.0266)	(0.0194)	(0.0173)	(0.0266)
College	0.101	−0.124***	0.00160	−0.00502	0.00719*	0.0535**	−0.0238	0.0542***	−0.0245
College	(0.301)	(0.0463)	(0.00396)	(0.0150)	(0.00388)	(0.0261)	(0.0192)	(0.0167)	(0.0264)
University	0.0713	−0.128***	0.00187	−0.00331	0.0136***	0.0489*	−0.0252	0.0542***	−0.0235
University	(0.257)	(0.0463)	(0.00396)	(0.0150)	(0.00410)	(0.0261)	(0.0192)	(0.0167)	(0.0264)
PhD	0.00448	−0.127***	0.000706	−0.00288	0.0154**	0.0441	−0.0321*	0.0547***	−0.0410
PhD	(0.0668)	(0.0472)	(0.00446)	(0.0157)	(0.00752)	(0.0271)	(0.0195)	(0.0177)	(0.0269)
Constant		−1.516***	0.116	0.280	−0.457**	2.714***	−0.739***	−0.923***	−0.659***
Constant		(0.382)	(0.0985)	(0.173)	(0.212)	(0.391)	(0.139)	(0.247)	(0.251)
Number of observations		10,041	10,041	10,041	10,041	10,041	10,041	10,041	10,041
R-squared		0.200	0.040	0.505	0.188	0.428	0.088	0.108	0.299

Source: Authors’ calculations based on HKÉF 2011. Heteroscedasticity-robust standard errors are displayed in parentheses.

Significance levels: 10%

Significance levels: 5%

Significance levels: 1%

Table B.2. Expenditure elasticities by household type.

	Household type								Total
Retired	no	no	no	no	yes	yes	yes	yes
Couple	no	no	yes	yes	no	no	yes	yes
Child	no	yes	no	yes	no	yes	no	yes
Food and non-alc. beverages	0.77	0.82	0.74	0.75	0.82	0.83	0.77	0.74	0.77
Alcoholic beverages	1.06	1.17	1.09	1.17	1.06	1.30	1.08	1.16	1.09
Tobacco	0.65	0.62	0.63	0.60	0.47	0.75	0.54	0.71	0.58
Clothing and footwear	1.27	1.24	1.22	1.19	1.56	1.28	1.32	1.22	1.31
Water and energy	0.35	0.41	0.34	0.31	0.45	0.44	0.39	0.38	0.37
Rents	1.29	1.56	1.56	1.75	1.80	1.55	1.80	1.80	1.64
Household services	0.83	0.84	0.74	0.73	0.87	0.85	0.78	0.71	0.79
Health	1.07	1.10	0.98	0.98	1.04	1.02	1.00	0.96	1.02
Private transport	1.07	1.08	0.98	0.97	1.21	1.06	0.99	0.95	1.05
Public transport	1.30	1.30	1.12	1.15	1.80	1.28	1.36	1.07	1.35
Communications	0.84	0.83	0.75	0.69	0.86	0.79	0.74	0.67	0.78
Recreation and culture	1.25	1.27	1.25	1.25	1.43	1.32	1.30	1.33	1.30
Education	1.47	1.30	1.44	1.43	1.80	1.80	1.80	1.64	1.59
Restaurants and hotels	1.51	1.59	1.67	1.66	1.80	1.80	1.80	1.80	1.69
Other goods and services	1.61	1.66	1.80	1.80	1.19	1.80	1.68	1.80	1.61
Durable goods	1.80	1.80	1.80	1.75	1.80	1.80	1.80	1.80	1.79

Source: Authors’ calculations based on HKÉF for year 2011.

Table B.3. Price elasticities by household type.

	Household type								Total
Retired	no	no	no	no	yes	yes	yes	yes
Couple	no	no	yes	yes	no	no	yes	yes
Child	no	yes	no	yes	no	yes	no	yes
Food and non-alc. beverages	−0.47	−0.52	−0.46	−0.47	−0.51	−0.54	−0.48	−0.46	−0.48
Alcoholic beverages	−0.53	−0.59	−0.55	−0.59	−0.53	−0.65	−0.55	−0.58	−0.55
Tobacco	−0.34	−0.32	−0.32	−0.31	−0.24	−0.39	−0.28	−0.37	−0.30
Clothing and footwear	−0.66	−0.65	−0.63	−0.63	−0.79	−0.66	−0.68	−0.64	−0.68
Water and energy	−0.22	−0.26	−0.21	−0.19	−0.30	−0.28	−0.25	−0.24	−0.24
Rents	−0.66	−0.79	−0.78	−0.88	−0.90	−0.78	−0.90	−0.90	−0.83
Household services	−0.46	−0.47	−0.41	−0.40	−0.48	−0.48	−0.43	−0.39	−0.44
Health	−0.55	−0.56	−0.51	−0.50	−0.56	−0.54	−0.54	−0.50	−0.53
Private transport	−0.56	−0.56	−0.53	−0.53	−0.62	−0.55	−0.54	−0.52	−0.56
Public transport	−0.66	−0.66	−0.57	−0.58	−0.90	−0.65	−0.68	−0.54	−0.68
Communications	−0.46	−0.45	−0.41	−0.38	−0.46	−0.43	−0.40	−0.37	−0.42
Recreation and culture	−0.66	−0.66	−0.65	−0.65	−0.73	−0.68	−0.67	−0.68	−0.67
Education	−0.74	−0.66	−0.73	−0.72	−0.90	−0.90	−0.90	−0.82	−0.80
Restaurants and hotels	−0.77	−0.81	−0.85	−0.84	−0.91	−0.90	−0.90	−0.90	−0.86
Other goods and services	−0.82	−0.85	−0.91	−0.92	−0.65	−0.91	−0.87	−0.92	−0.83
Durable goods	−0.91	−0.91	−0.91	−0.89	−0.91	−0.91	−0.91	−0.91	−0.91

Source: Authors’ calculations based on HKÉF for year 2011.

Table B.4. Changes in VAT payments by household income decile and household type (thousand HUF).

Income decile		Household type								Total
	Retired	no	no	no	no	yes	yes	yes	yes
	Couple	no	no	yes	yes	no	no	yes	yes
	Child	no	yes	no	yes	no	yes	no	yes
1		−32.7	−56.8	−53.9	−73.5	−31.1	−69.7	−60.7	−77.1	−51.6
2		−35.9	−56.3	−59.4	−66.4	−38.7	−43.4	−55.9	−61.9	−50.0
3		−47.7	−51.0	−58.5	−69.8	−37.3	−76.2	−50.2	−91.6	−49.8
4		−46.6	−55.9	−65.6	−76.1	−40.0	−77.5	−55.6	−82.3	−54.7
5		−46.8	−62.4	−64.5	−73.2	−46.7	−60.0	−65.0	−65.4	−59.1
6		−44.3	−57.2	−70.8	−75.5	−45.1	−98.1	−63.9	−85.9	−61.3
7		−54.2	−54.6	−73.8	−79.3	−51.5	−77.1	−70.5	−93.4	−68.4
8		−51.3	−68.3	−76.6	−78.3	−57.9	−71.5	−77.6	−77.3	−71.7
9		−50.5	−83.5	−82.1	−85.9	−59.1	−73.7	−83.3	−119.8	−77.5
10		−64.8	−78.3	−95.6	−94.6	−69.0	−103.0	−91.4	−118.0	−88.8
Total		−45.7	−59.0	−72.8	−78.0	−44.1	−73.1	−69.8	−87.7	−63.3

Source: Authors’ calculations based on HKÉF for year 2011. Household income decile is defined according to the OECD-modified scale.