Impact of VAT Reform on Swedish Restaurants: A Synthetic Control Group Approach*

• Author: Sofia Tano,Jonas Månsson,Björn Falkenhall
• Date: 01 April 2020
• Published date: 01 April 2020
• DOI: http://doi.org/10.1111/sjoe.12340

Scand. J. of Economics 122(2), 824–850, 2020

DOI: 10.1111/sjoe.12340

Impact of VAT Reform on Swedish

Restaurants: A Synthetic Control Group

Approach*

Bj¨orn Falkenhall

The Swedish Pharmacy Association, SE-111 56 Stockholm, Sweden

bjorn.falkenhall@sverigesapoteksforening.se

Jonas M˚ansson

Linnaeus University, SE-351 95, V¨axj¨o, Sweden

jonas.mansson@lnu.se

Sofia Tano

Tillv¨axtanalys, Studentplan 3, SE-831 40, ¨

Ostersund, Sweden

sofia.tano@tillvaxtanalys.se

Abstract

In this paper, we investigatethe impact on fir ms of the valueadded tax (VAT) reform that took

effectin Sweden on 1 January 2012 for restaurant and catering services. Unlike previous research,

we use a synthetic control group approach to construct our counterfactual. Our analysis shows

that theVATreduction had a positive effect on turnover, total wages,employment, profit margins,

and net entry of firms. The effects of the reform tend to decrease over time. In all, the results

point to an overall better performance for the restaurant industry compared with what it would

have been in absence of the reform.

Keywords: Control group; impact; restaurant industr y; VATreduction

JEL classification:D4; D22; H25; H71

I. Introduction

A reform that targets a whole country, sector, or region, such as value

added tax (VAT) reform, is in general very difficult to evaluate because no

counterfactual situation occurs – all cases are treated. Previous studies have

solved this problem by constructing either a control group, consisting of a

selection of other countries or regions (e.g., Doyle and Samphantharak,

2008; Marion and Muehlegger, 2011; Harju and Kosonen, 2014), or a

comparison group, consisting of a selection of industries (Kosonen, 2015)

or all industries except the treated industry (e.g., Carbonnier, 2007; Houel,

*This research was funded by the SwedishAgency for Growth PolicyAnalysis.

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The editors of The Scandinavian Journal of Economics 2018.

B. Falkenhall, J. M˚ansson, and S. Tano 825

2010; O’Connor, 2013). However, in all these studies, the analysis can

be questioned based on the selection. In contrast to previous research on

VAT reforms, we make use of a synthetic control group (SCG) approach

to analyse the effects on the targeted industry. This approach allows us

to construct a hypothetical, or synthetic, restaurant industry based on the

weighted average of other industries in Sweden. We decided to construct

the SCG with other industries in Sweden that were not affected by the

reform, rather than with restaurants in other countries, for two reasons

mainly. First, the institutions, economies, inflation rates, and other cultural

aspects differ across countries, making it difficult to find suitable country

matches. secondly, the available micro-data from other countries, such as

those in the European Union (EU) or other Nordic countries, are limited

and difficult to access.

In this paper, we adopt a firm perspective on the VAT reduction for

Swedish restaurants. Using register data on firms in Sweden, we investigate

the effect of the VAT reform on different components of a firm’s profit

function. The research questions are the following. What are the effects of

the reform in terms of turnover, total wages, employment, and gross profit

margin in the restaurant sector? Is there an increase in the net entry of

firms in the industry?1

The paper is organized as follows. In Section II, we present the Swedish

VAT reform and its expected outcome. In Section III, we present previous

empirical investigations of the impact of VAT reductions. In Section IV, we

give a brief motivation for the outcomes used in this evaluation based on a

theoretical discussion. In Section V, we discuss the identification, the data,

the model, and its limitations. In Section VI, we present the results, and

we conclude in Section VII.

II. The Reform

On 1 January 2012, the VAT rate for restaurants and catering services in

Sweden was reduced from 25 to 12 percent, putting the VAT for restaurant

and catering services on the same level as that for takeaway food and

groceries. Alcohol was not affected by this reform and continues to be

taxed at 25 percent. The main aim of the reform was to increase the

long-term employment rate through an increased demand for restaurant and

1The impact on prices is omitted from our analysis. However, according to the Swedish National

Institute for Economic Research (2015), the price effect is positive and larger in the first year

after the reform (4 percent) and decreases during the second year (1.5 percent). Further, the

price pass-through is roughly estimated to be 50 percent; however, the total price pass-through

increases over time.

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The editors of The Scandinavian Journal of Economics 2018.