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Can temporary tax breaks incentivize Consumer spending?

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Based on official statistics, the analysis clarifies the problem of tax benefits by answering the title from several points of view.

As a rule, if the prices of goods and services fall, then the real income of consumers will rise. So, people/families will have more disposable income to spend and therefore the demand for domestic products will increase.

The effectiveness of the VAT reduction depends on the extent to which basket products and goods for general consumption with reduced VAT are passed on to the market at reduced prices for consumers, as well as the extent to which consumers respond to these price changes, further increasing the consumption of these products.

One of the most well-known and targeted fiscal policy interventions is the exemptions or reductions in the value added tax (VAT) rate to increase consumption in sectors such as: food baskets, accommodation, energy for families, fuel for public transport and activities every day that are most affected by the crisis or anemic economic growth.

VAT is the most widely used indirect tax on the consumption of goods and services in the country, which accounts for about one third of total tax revenue. This indicator level is also similar in the countries of the European Union. Albania has established some facilities for accommodation and information technology under the standard rate of VAT, which is 20 percent. However, the latest political trends are not to create new lists of goods and services that can be exempted from VAT, or be subject to a reduction in the standard VAT rate.

Although this intervention of the tax policy continues to be a source of economic distortions, it seems that the new political climate abroad and at home may force policymakers to give relief from VAT, especially for food products in an effort to advance the objectives of the stimulus of family/private consumption.

If the prices of goods and services fall, then the real income of consumers will increase, so people will have more disposable income to spend and therefore the demand for domestic products will increase.

It can provide a short-term boost to the economy by giving people more money to spend and prompting consumers to bring forward purchases to take advantage of temporarily lower prices prompted by the need for a boost in consumer confidence.

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Description

A tax reduction/exemption to stimulate consumption is more effective the larger the portion spent. The practices analyzed suggest that personal tax cuts will be more likely to be spent if they go to individuals with lower incomes. The tax cut/exemption for lower income individuals is likely to be more effective than some other tax cuts, including VAT.

There are some experiences of benefits/exemptions from income tax or VAT in the history of taxation in Albania, which suggest that large-scale tax reductions have a smaller stimulatory effect than those related to individuals, but this testimony cannot be considered completely certain.

However, studies of the payroll tax exemptions and those for income tax and VAT for small business revealed to us that a significant part of the benefits from the exemption from the two main taxes was spent on the economy and on capital financing low cost.

The effect of the business tax cut is uncertain, but it is unlikely that the tax cuts will have large cash flow effects.

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