Corona pandemic and the economy: VAT reduction much more important than previously thought

Was the VAT reduction last year from July to December just an expensive show – or a very effective tool to boost private consumption in the corona crisis? Did p

Corona pandemic and the economy: VAT reduction much more important than previously thought

Was the VAT reduction last year from July to December just an expensive show – or a very effective tool to boost private consumption in the corona crisis? Did people even care at that time about how high the tax was, when the pandemic and corona measures determined the whole life? Even ten months after the end of the project, economists are still preoccupied with these questions.

Christian Siedenbiedel Editor in business. Immediately after the tax was raised again in January, Clemens Fuest, the president of the Munich Ifo Institute, had taken a sobering stock based on Forsa surveys among 30,000 citizens: the tax cut had brought 6.3 billion euros in additional consumption - but these were disproportionate to the costs of 20 billion euros.

Now a group of economists led by Rüdiger Bachmann from the American University of Notre Dame has once again dealt with the topic in detail for a working paper – and comes to almost opposite results. The authors themselves mainly blame the better data situation today for this.

In your study "A temporary VAT reduction as an unconventional fiscal policy" you explain that the tax reduction at that time made many people prefer the purchase of durable consumer goods in particular. This has noticeably supported private consumption in the difficult period of the second half of 2020 – the authors estimate the total effect on consumption at 34 billion euros.

Four large data sets evaluated

The authors do not go into the question of whether the VAT reduction was passed on from companies to consumers at all for a long time. Scientists led by the economic expert Monika Schnitzer had found last summer that the tax cut had only been passed on to 61 percent for gasoline, for example, and to 83 percent for diesel.

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The Ifo Institute had compared the price development of 60,000 products of the supermarket chain Rewe with that of its Austrian counterpart Billa and came to the conclusion that the tax cut had been passed on there quite completely. The Bundesbank assumed that 60 percent would be passed on across all sectors.

Updated Date: 03 November 2021, 00:00

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