On the response of household expenditure on cinema and performing arts to changes in indirect taxation: a natural experiment in Spain

Abstract

This paper draws inference on the effect of changes in indirect taxation on household spending on cinema and performing arts using data from the Spanish household expenditure survey. As of September 2012, value-added tax (VAT) on cinema and performing arts in Spain was raised 13 percent points, with the exception of the Canary Islands which are not part of the Spanish VAT territory. Indirect taxation levied on cinema and performing arts through the General Indirect Tax of Canary Islands (Impuesto General Indirecto de Canarias, IGIC) had changed in July 2012 by only 2 percent points. Such an uneven raise in the tax rates is the source of exogenous variation used for identification in this paper. As the sample of treated households (exposed to the VAT rise) is much larger than the sample of untreated households (exposed to the IGIC rise), we use causal inference methods to estimate the average treatment effect of the VAT rise on the untreated households. We find that the average household expenditure on cinema and performing arts of the untreated households would not have changed significantly, had untreated households been exposed to the VAT rise. However, this average treatment effect would not have been homogeneous, as we identify an average treatment effect conditional on participation of 52.37 euros. Thus, the tax rise would have increased the annual expenditure of those households that spend on cinema and performing arts regularly.