The increase of vat and the impact on the consumption of the commercial sector of the metropolitan district of Quito in 2016 – 2017 period

(Enero - Junio)

Abstract

This study determines the impact in the consumption of good and services in the Metropolitan District of Quito generated by the variation of the added value tax (VAT) from 12% to 14%, after the approval of the Organic Law of Solidarity and the Citizenship Co-responsibility for the Reconstruction and Reactivation of affected zones by the earthquake in April 16th 2016. The applied methodology considers the data obtained from closed surveys directed to a sample of 383 retailers, which assesses the theory linked to the price elasticity of demand and the Laffer curve.

Therefore, in the result it can be observed that the price elasticity of demand is more elastic when prices of goods and services are increased, mean while it is more inelastic when those prices are reduced, after the change in the tax rate from 12% to 14% and from 14% to 12%, respectively. Additionally, the tax collection of solidarity contributions was superior for 62.93% to the initial amount forecasted.  Hence, the price elasticity of demand theoretical approach is validated with the observed market dynamics in this study.