High food prices: VAT dispute


FAQ

Status: 04/22/2022 5:39 p.m

Due to the sharp rise in food prices, calls have been made to suspend VAT on basic foods. What are the reactions from politicians? And what do economists say about it?

What is required?

In view of significant food price increases, the social association VdK, the Federation of German Consumer Organizations (vzbv) and the German Diabetes Society have called on the federal government to temporarily suspend VAT on basic foods. More and more people are reaching their financial limits, said Vdk President Verena Bentele. “The VdK is therefore calling for a drastic reduction in VAT on staple foods, to zero percent.” A healthy diet should “not be a question of money,” said Barbara Bitzer, Managing Director of the Diabetes Society. The tax should be abolished for fruit, vegetables, milk and legumes.

What are the arguments for this?

Federal Minister of Agriculture Cem Özdemir supports the demands of the social organizations and consumer centers. “If we make fruit and vegetables cheaper, we not only relieve the burden on consumers comparatively inexpensively, but also promote healthy nutrition through the steering effect gained,” said the Green politician. However, the Ministry of Finance is responsible for examining and implementing possible VAT changes. Left parliamentary group leader Dietmar Bartsch also spoke out in favor of it. “The temporary suspension of VAT on staple foods is a measure that would take effect quickly, something like this is needed now,” he told the “Tagesspiegel”.

Marcel Fratzscher, President of the German Institute for Economic Research (DIW), is also in favor of temporarily abolishing the reduced VAT rate of seven percent. As a result, “food and other basic necessities in particular would be cheaper”. This helps people quickly and unbureaucratically.

What are the arguments against it?

FDP parliamentary group leader Christian Dürr criticized in the “Neue Osnabrücker Zeitung” that such a tax cut is not a measure that specifically relieves people with low incomes. “Even the reduced VAT rate during the pandemic hardly made itself felt in the wallet,” said Dürr. On the other hand, he relies on the relief packages decided by the traffic light coalition, which are intended to cushion the increased costs for the citizens. They contained measures “for families and households that are having a particularly difficult time,” said Dürr. “It definitely makes more sense than a patchwork quilt for VAT.” The SPD’s financial policy spokesman in the Bundestag, Michael Schrodi, also referred to the government’s relief packages.

Michael Hüther, head of the German Economic Institute (IW), also sees no solution in eliminating VAT. “The problem with a temporary reduction in VAT then lies in determining the right point in time for the re-increase, which is not known in advance,” he told the “Rheinische Post”. A reduction in VAT should therefore “if necessary be understood as permanent”.

Are there any counter-suggestions?

The DIW economist Alexander Kriwoluzky proposes paying a lump sum to specifically relieve people with low incomes. “It would make sense to have a one-off food allowance of 100 euros for transfer recipients,” said the head of the macroeconomics department at the economic research institute in the “Tagesspiegel”.

Stefan Kooths from the Kiel Institute for the World Economy has spoken out in favor of the release of agricultural land in order to increase production in the agricultural sector. “This would get to the root of the problem and do something for the world’s poorest, who benefit from every tonne that comes onto the market,” said the expert.

how big is the problem

Food prices have risen sharply since the outbreak of the Ukraine war. According to the Federal Statistical Office, food cost 6.2 percent more in March than in the same period last year. German consumers had to pay 30 percent more for sunflower or rapeseed oil and around 18 percent more for salad or potatoes. Fresh vegetables were also almost 15 percent more expensive compared to March 2021.

For which products does 7 percent VAT apply?

The sales tax law regulates which products are subject to the reduced rate of 7 instead of 19 percent sales tax. This applies to foods such as meat, fish, fruit, vegetables, flour, baked goods or oils. But firewood, newspapers, books, sheet music, prostheses or works of art also have the reduced tax rate.

How much government revenue is it?

According to the monthly report of the Federal Ministry of Finance, 35.75 billion euros in sales taxes flowed into the state coffers in March alone. That was almost 41 percent more than in the previous year. In January and February of the current year, the state had already collected 51.2 billion euros in VAT, which was 14 billion euros more than in the first two months of 2021. For comparison: last year, tax revenue from sales totaled 113.13 Billion euro.

Left parliamentary group leader Dietmar Bartsch demands that the additional income should be paid back to the citizens. The Federal Minister of Finance was “the main beneficiary of the excessively high prices,” the politician told the “Neue Osnabrücker Zeitung” at the end of March. It is estimated that a temporary suspension of the reduced VAT on staple foods such as bread, processed meat and dairy products would cost the state around two billion euros in revenue.

Is a VAT suspension compatible with EU law?

At the beginning of April, an amendment to the EU Value Added Tax System Directive came into effect. This means that there are common requirements for value added tax in the EU countries: the regular tax rate must therefore be at least 15 percent, the reduced rate at least five percent. Complete tax exemptions are only possible in certain areas – since the change, this also applies to staple foods.

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