Debate on VAT: Tax cut against expensive groceries?

Because of the high inflation, there are calls for a reduction in VAT on food. Who that would relieve and to what extent depends on the design. What are the suggestions and why is it difficult to implement?

Inflation has recently reached its highest level in almost 50 years. Poorer households in particular are severely affected by inflation. Could a reduction in VAT on groceries provide relief? The VdK and the Federal Environment Agency are in favor, as are the CSU, the Green Minister of Agriculture Cem Özdemir and the Left Party: They all call for a reduction in VAT on food – albeit in different ways and with different arguments. Some are more concerned with rapid relief in the face of inflation, others with ecological aspects.

EU allows VAT reduction to zero

Another background to the debate: At the beginning of April, the EU Commission changed the European Value Added Tax Directive. Since then, in addition to the regular and reduced VAT rates, a zero tax rate on essential goods has also been possible.

Shortly thereafter, the first calls were made to use this opportunity and to completely eliminate VAT on groceries, which is currently usually seven percent. That would be a quick way to ease the burden on citizens given inflation in food, which rose to 12.7 percent in June. The proposal has met with great approval from the population: in surveys, three quarters of those questioned are positive.

Food is not just food

The concrete demands of the proponents differ. The president of the social association VdK, Verena Bentele, has “healthy foods such as fruit, vegetables, dairy products, flour, pasta” in mind, but at the same time speaks of “things that are needed for everyday needs”. The left in the Bundestag called for “basic food” to be reduced to zero without specifying this – similar to the demand of the CSU. However, how high the tax shortfalls for the federal government are and how high the relief for citizens can be depends on the specification.

The Federal Environment Agency and environmental organizations such as Greenpeace also want changes, but are against a blanket waiver of VAT on food. “We should create the relief for the citizens in such a way that we redeem the social component, but at the same time act in an environmentally sensible manner,” says Dirk Messner, President of the Federal Environment Agency. On the one hand, his agency proposes eliminating VAT on fruit, vegetables and legumes (such as lentils and beans) and on the other hand – albeit not immediately – VAT on animal products such as meat and milk from 7 to 19 percent to increase. Messner’s argument: about a kilo of greenhouse gases would be used for a kilo of vegetables or fruit, the production of a kilo of meat, sausage and dairy products is associated with greenhouse gas emissions between seven and 28 kilos.

Criticism of this proposal followed promptly: Katja Hessel, FDP State Secretary in the Federal Ministry of Finance, asked why a pineapple from South America should be taxed better than meat from regional production.

Tax losses in the tens of billions

The question of which food falls into which category in the event of a change in VAT is not the only criticism of the considerations. A complete waiver of value added tax on food would result in tax revenue that would be reduced by 12 to 13 billion euros. Relief of this amount must be targeted, said representatives of the traffic light coalition recently in a Bundestag debate on the subject: “The money can only be spent once. That’s why we have to think carefully about which measures will help,” said SPD MP Tim Klüssendorf.

Advocates such as Marcel Fratzscher, President of the German Institute for Economic Research (DIW), point out that poorer households will particularly benefit from such a tax cut. Because they use a larger part of their income for food than richer households. But in absolute figures it would look different, explains the CDU budget politician Fritz Güntzler: A complete waiver of VAT on food would save a poor household an annual saving of 74 euros, while a richer household would save around 180 euros.

Would a tax cut be passed on?

However, the sizes given only apply if the trade were to pass the tax reduction on to the customers in full. Many politicians and economists doubt this and refer to the temporary reduction in VAT in the second half of 2020. With the temporary reduction in VAT (from 19 to 16 percent at the regular tax rate or from seven to five percent at the reduced tax rate), a stronger economic downturn can be prevented. According to an investigation by the Bundesbank, 60 percent of the tax cut was passed on to customers overall. The researchers at the Munich ifo Institute came up with 70 to 80 percent for the food sector.

The fact that part of a tax cut doesn’t reach the citizens, but the chain stores, “we can’t afford,” explains the Green MP Katharina Beck. However, other politicians from her party, such as Minister of Agriculture Özdemir, can certainly imagine doing without VAT on certain foods.

But there is also fundamental criticism of a change in VAT law: “VAT is enormously important, but it has also become confusing and contradictory,” says FDP politician Till Mansmann. There are already regulations that are difficult to understand: normal potatoes are subject to 7 percent VAT and sweet potatoes 19 percent. The tax rate is seven percent for apples and 19 percent for apple juice. Further differentiation is likely to further complicate the system.