Price Effects of a Temporary VAT Cut in Argentina
Argentina’s experiment with a temporary reduction in value-added tax (VAT) provides a striking example of how tax policy can influence consumer prices. The chart tracks the effect of a VAT cut from 21% to 0%, followed by its reintroduction, and how the outcomes differed under different price control measures.
In late 2019, Argentina removed VAT on certain essential goods in an attempt to cushion households against rising inflation. As the graph shows, this policy immediately pushed prices downward. The full pass-through effect was about –17.4 percentage points, reflecting that the VAT reduction translated almost entirely into lower retail prices.
However, the relief was short-lived. When VAT was reintroduced in early 2020, prices rebounded sharply. The chart highlights two scenarios:
No caps (red line): Prices rose quickly and consistently after VAT was reinstated, reaching more than 5 percentage points above the baseline by week 40 of 2020.
7% cap (blue line): In contrast, items subject to price caps showed a much smaller rebound, with increases largely contained below the 7% ceiling.
This divergence illustrates how government-imposed price controls can temporarily restrain inflationary pressures, though they may also distort markets if sustained for long periods.
The Argentine case underscores two key insights. First, VAT cuts can be highly effective in providing immediate price relief to consumers, especially in times of economic stress. Second, once taxes are restored, market dynamics—unless moderated by regulations—tend to push prices back up, sometimes even overshooting previous levels.
For policymakers, the lesson is clear: while tax relief can ease the burden on households, its long-term effectiveness depends on complementary measures such as inflation management, fiscal discipline, and structural reforms. Without these, temporary interventions risk being undone as quickly as they are applied.
