Abstract
There are surprisingly few precise estimates of the effects of consumption taxes on prices. We consider a Swedish reform which reduced value added tax (VAT) on restaurant food services from 25 to 12 percent while the VAT on serving alcohol remained at 25 percent. Comparing prices at Swedish restaurants serving alcohol to similar ones on ferries and in Norway, we estimate the effects using a difference in difference strategy. Dinner prices in Stockholm County were reduced on average by almost 2 percent, while Swedish prices decreased by about 1.4 percent. Reduced dinner prices imply an increased demand of complementary alcoholic beverages. We show that the expected price response of alcoholic beverages to the reform is ambiguous. While we find no significant effects to the reform on wine and beer prices in general, we find indicative evidence that those restaurants that reduced food prices relatively more also increased alcohol prices more.