2012 Vat Reform in Spain: The Food and Non-Alcoholic Beverages Case. Welfare Consequences

This paper analyzes the effects that the 2012 VAT reform in Spain had on households' welfare, focusing on one of the main expenditure groups: food and non-alcoholic beverages. To that end, households' demands are modeled as a QUAIDS, which is then estimated by means of a consistent two-step estimator introduced in Tauchmann (2010) and never before applied to studies of this type. This procedure allows one to properly impose the traditional parameter restrictions that utility maximization requires on candidate demand functions in the context of a censored model. The results indicate that the higher the income level of a household, the lower the welfare loss of that household relative to its annual income. As a conclusion, the increment in the VAT tax rates that took place in Spain in 2012 could be considered as regressive. Additionally, the tax reform would have caused a lower social loss the higher the inequality aversion of Spanish society as a whole.