The VAT debate: tax cuts on expensive groceries?


analysis

Status: 07/13/2022 11:20 am

Due to high inflation, there are demands to reduce VAT on food. Who would be relieved and to what extent depends on the project. What are the suggestions and why are they difficult to implement?

Hans-Joachim Vieweger analysis, ARD capital studio

Inflation recently reached an all-time high in almost 50 years. Poorer households in particular are hit hard by inflation. Can a reduction in VAT on food products bring a relief? The VdK and the Federal Environment Agency are behind it, as is the CSU, Green Agriculture Minister Cem Özdemir and the Left Party: They are all calling for a reduction in VAT on food – albeit in different ways and with different arguments. Some are more interested in quick inflation relief, others in environmental aspects.

The EU allows you to reduce VAT to zero

Another background for the debate: In early April, the European Commission amended the European directive on value added tax. Since then, in addition to the normal and reduced VAT rates, a zero tax rate on basic goods is also possible.

The first calls were made shortly thereafter to take advantage of this opportunity and eliminate VAT on groceries entirely, which is now typically seven percent. That would be a quick way to ease the burden on citizens, given food inflation, which rose to 12.7 percent in June. The proposal was highly appreciated by the public: in the questionnaires, three-quarters of the respondents are positive.

Eating is not just eating?

The specific demands of the followers vary. The president of the VdK social association, Verena Bentele, means “healthy food such as fruit, vegetables, dairy, flour, pasta”, but at the same time speaks of “things that are needed for everyday needs”. The left wing in the Bundestag called for the reduction of “staple food” to zero without specifying it, as is being postulated by the CSU. However, how high the tax shortages for the federal government and how high the relief for citizens may be depends on the specification.

The Federal Environment Agency and environmental organizations such as Greenpeace also want change, but are against the complete abolition of VAT on food. “We should create relief for citizens in such a way as to redeem the social component, but at the same time act in an ecologically sound manner,” says Dirk Messner, president of the Federal Environment Agency. On the one hand, his agency proposes to abolish VAT on fruit, vegetables and legumes (such as lentils and beans), and on the other – though not immediately – to increase VAT on animal products such as meat and milk, from 7 up to 19 percent Messner’s argument: About a kilogram of greenhouse gases would be used per kilogram of vegetables or fruit, producing a kilogram of meat, cold cuts and dairy products produces greenhouse gas emissions of between 7 and 28 kilograms.

Criticism of this proposal emerged quickly: Katja Hessel, FDP secretary of state in the Federal Ministry of Finance, asked why South American pineapple should be taxed better than meat from regional production.

Tax losses in the tens of billions

The question of which food belongs to which category in the event of a change in VAT is not the only criticism of the considerations. The complete elimination of the value added tax on food would reduce tax revenues by EUR 12 billion to EUR 13 billion. The release of this amount must be targeted, representatives of the traffic light coalition said recently during a debate in the Bundestag on the subject: “Money can only be spent once. Therefore, we need to carefully consider which measures will help, “said the SPD MP. Tim Klüssendorf.

Supporters such as Marcel Fratzscher, president of the German Institute for Economic Research (DIW), point out that poorer households will particularly benefit from the tax cut. Because they spend more of their income on food than wealthier households. But in absolute terms, it would be different, explains CDU budget policy Fritz Güntzler: The complete abolition of VAT on food would save a poor household EUR 74 a year, while a richer household would save around EUR 180.

Would the tax cut be passed?

However, the figures quoted only apply if the trade would pass on the tax reduction in full to customers. Many politicians and economists doubt this and refer to a temporary cut in tax on goods and services in the second half of 2020. With a temporary reduction in the tax on goods and services (from 19 to 16 percent at the normal rate or from 7 to 5 percent at the reduced tax rate), a major economic slowdown can be prevented. According to an investigation by the Bundesbank, 60 percent of the tax cuts overall have been passed on to customers. Scientists at the Munich Ifo Institute went from 70 to 80 percent for the food sector.

The fact that part of the tax cut does not reach the citizens, but the chain stores “cannot afford” explains Green MEP Katharina Beck. Other politicians in their party, such as Agriculture Minister Özdemir, certainly envision no VAT on certain food products.

But there is also a fundamental criticism of the change in VAT law: “VAT is extremely important, but it has also become confusing and contradictory,” says FDP politician Till Mansmann. There are already laws that are difficult to understand: ordinary potatoes are taxed at 7%. 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 complicate the system even more.

Food Tax Cut: A Cure For Inflation?

Hans-Joachim Vieweger, ARD Berlin, 7/13/2022 09:42

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