Germany is in dire straits with food shortages, to help households, the government is considering a reduction of the VAT rate — which could also benefit the climate and biodiversity.
Inflation is high, with food prices up by about 21% between November 2021 and November 2022. To ease the burden on households, Germany is debating reducing the value-added tax (VAT) on certain foods. German Agriculture Minister Cem Özdemir has repeatedly urged getting rid of VAT on healthy foods. The German Environment Agency (UBA) and the Federation of German Consumer Organizations (VZBV) advocacy group are also calling for VAT on plant-based foods to be abolished.
Basic foodstuffs are taxed at a reduced rate of 7%. The VAT rate for other products is 19%. A VAT exemption for fruit, vegetables, cereal products and vegetable oils could mean savings of about €4 billion ($4.3 billion) a year for private households, according to an estimate by UBA head Dirk Messner.
Will prices really drop?
Companies must pass on the VAT reduction to consumers for it to take effect. "In principle, we have relatively strong competitive pressure in the German food retail sector, so it is reasonable to expect that, at least in the longer term, the VAT reduction will be passed on to private households," says DIW research associate Stefan Bach. In view of high inflation, energy and other costs, he doubts companies will quickly pass on any VAT cuts in the short and medium term, however.
A look at a temporary VAT cut in 2020, when the regular VAT rate was reduced from 19% to 16% and the reduced rate dropped from 7% to 5% for six months, is an indication of how companies react to VAT changes.
According to a German Bundesbank study, 60% of the tax cut was passed on to customers in the economy as such; 70% to 80% were passed on in the food sector, according to researchers at the Munich-based Ifo Institute.
Still, the situation was different then: the VAT cut did not only apply to foodstuffs, inflation was not what it is now, and it was clear from the start the tax relief was temporary. Therefore, it is difficult to forecast the effect of a VAT cut, says DIW expert Bach, adding that relatively little data is available because the value-added tax hasn't been around that long yet, and has tended to be increased rather than decreased when it has changed in the past.