November 22, 2017
Heterogeneity in the Tax Pass-Through to Spirit Retail Prices: Evidence from Belgium
Valerio Serse, CORE UCLouvain
On 1st November 2015, the Belgian government increased the excise tax on alcoholic beverages. For spirits with 40% of alcohol and bottle size of 70cl, this tax change is equivalent to an extra-tax of 2,43€ per bottle of spirits. This paper studies the impact of this tax increase on the retail price of six major brands of spirits, using a difference-in-differences approach. The estimation is based on a balanced panel of scanner data from a major supermarket chain. We use the retail prices of the same brands sold in France by the same supermarket chain as a control group. Exploiting spatial variation in prices across local retailers, we test for heterogeneity in tax pass-through related to local differences in supply and demand-side factors. In particular, we construct a variable for the intensity of competition at the retailer level (measuring the number of competing retailers within a driving distance of 15 minutes), and another variable for cross border shopping (measured by the proximity of each shop to the border). These two variables allow testing whether spatial differences in the tax pass-through are related to the intensity of local competition and to the scope for cross-border shopping. Lastly, a month-by-month analysis is performed to estimate the speed and persistency of the tax pass-through heterogeneity across local stores. The last section of the paper provides some descriptive statistics about the evolution of spirit demand in these Belgian stores before and after the tax change.