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The Stimulus Effect of the VAT cut - an early assessment

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In late November 2008, the UK government announced a temporary cut in the VAT rate, from 17.5% to 15%, to run from December 1st 2008 to December 31st, 2009. The aim of the policy was to stimulate household spending. We review the economics of a Temporary VAT cut. We identify key issues, including the pass-through and salience of the tax, and inter-temporal substitution responses of households. We review what was known about these issues prior to the policy, and hence what we thought the impact would be. We provide some early empirical evidence on the impact of the policy. Finally, we sketch a research agenda going forward.

This talk is part of the Cambridge Finance Workshop Series series.

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