After VAT cut: demands for fundamental reform

Berlin The federal government reacted to the economic consequences of the corona crisis with a historic measure: It lowered the value added tax for the first time since its introduction in 1968.

Since July 1, the regular rate is no longer 19 but 16 percent by the end of the year, the reduced rate has been reduced from seven to five percent. This is supposed to boost consumption. But no sooner is the reduction in force than an extension of the measure was discussed. And now another debate is gaining momentum: is there a need for fundamental reform?

Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW Kiel), considers a reform of the excise taxes “overdue”. Felbermayr: “If discounts are abolished, the standard value added tax rate could easily fall to 18 percent, regardless of revenue.”

This is exactly how tax expert Stefan Bach from the DIW business institute sees it: “One should receive part of the VAT reduction permanently to relieve lower and middle incomes.” Bach also suggests lowering the regular rate to 18 percent, the reduced rate from seven to five Percent decrease.

Such a reduction would primarily relieve lower incomes that spend all of their money on consumption. The Federal Government had set itself the goal of tax relief for lower income groups. Such a tax cut could help the economy on its feet, especially in times of the Corona. Politicians should not talk about this beforehand after announcing a temporary cut as part of their stimulus package.

The reduced tax rate is a political minefield

DIW expert Bach recently calculated that a permanent VAT reduction would not be that expensive. A reduction in the standard rate to 18 percent would mean reduced tax revenues of 12.4 billion euros per year. If you deduct the relief for the state, it is only 9.5 billion euros.

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If the government were to abolish almost all reduced tax rates at the same time, the tax shortfalls would amount to almost five billion euros. But this is exactly where the problem lies: the reduced tax rates are a political minefield. It is undisputed that food should be subject to the reduced rate. But what about other products? For example with e-books, train tickets and tampons, for which VAT has just been reduced to seven percent? Touching it would result in tough arguments.

Therefore, not all economists consider reform to be a priority. For example, IW boss Michael Hüther says: “I do not consider a general lowering of some or all of the reduced rates to be politically enforceable. This would create problems of justice policy that are difficult to solve. “

In his opinion, it would be better to completely abolish the solidarity surcharge from next year, because this would also relieve all companies. Achim Wambach, President of the ZEW Economic Institute, says that generations of scientists and politicians have worked on the exceptions to VAT. “Since reforms have proven difficult and circumstances that once spoke in favor of a reduction in the tax rate can change, it should be considered to limit the reduced rates in principle.”

Because of the many discounts, the VAT is often no longer comprehensible. That makes the system bureaucratic and prone to fraud, especially in cross-border traffic, says Felbermayr. “It is urgent to clean up here. I recommend raising VAT back to its original level on January 1st, 2021, but at the same time tackling a more fundamental tax reform, which, however, requires longer preparation. “

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Proponents of a reduction in VAT also doubt that a reform will come. For this, politics would have to deal with many lobby groups. And: In international comparison, VAT is relatively low. Ifo researcher Andreas Peichl therefore believes that the future will continue in one direction: upwards. “At some point, the value added tax in Germany will be increased to over 20 percent.”

More: Olaf Scholz should turn the temporary tax cut into a permanent one, says Handelsblatt author Martin Greive.

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