Title: Tax-Inflation-Competition Trilemma: Indirect-Tax Pass-Through and Consumer-Price Volatility in the Post-COVID Economy
Authors: Khoi Tran Minh Ngan Nguyen Thi Thuy
Volume: 9
Issue: 10
Pages: 357-364
Publication Date: 2025/10/28
Abstract:
In the post-COVID economy, many governments deployed temporary VAT and excise adjustments to cushion living costs, yet most evaluations emphasize average price effects and overlook price risk - the volatility that shapes households' precautionary saving, firms' inventory buffers, and working-capital needs. This study investigates how shocks to indirect taxes affect both the level and the conditional variance of consumer prices, and how these effects depend on the inflation regime and market competition. The "Tax-Inflation-Competition" trilemma. We combine a policy-event difference-in-differences design with category-level EGARCH models to estimate variance responses and DCC-GARCH to track cross-category volatility spillovers. Interaction terms capture state dependence across high-versus low/moderate-inflation periods and differences in competitive intensity, with controls for exchange rates, energy costs, wages, and policy uncertainty. We find incomplete but material pass-through to price levels (?0.28-0.42 per 1-percentage-point statutory change), stronger under high inflation and in more competitive categories. VAT cuts stabilize volatility in calm regimes (e.g., Food, Durables, Services) but amplify it when inflation is high, especially in Energy and Transport; greater competition systematically dampens the volatility bump. Tax episodes tighten volatility co-movements (e.g., Energy-Transport correlation +0.21; Energy-Processed Food +0.16), reducing diversification along supply chains. These results imply that tax relief can lower mean prices while raising variance and synchronization under high inflation. A variance-aware design that conditions on regimes, reinforces competition, and smooths upstream cost noise is needed to convert tax measures into genuine macro-stabilization rather than transient subsidies.