Economist proposes scrapping Germany's reduced VAT rate

Economist Clemens Fuest has proposed a major German tax reform: abolishing Germany’s reduced value-added tax (VAT or Mehrwertsteuer) rate. Removing the 7 percent VAT rate will help generate extra revenue for the government.

Uniform taxation: Moving to a single German VAT rate

Following a permanent reduction in VAT rates in the hospitality sector in Germany earlier this year, a wider VAT shake-up has now been brought to the table. Clemens Fuest, president of the Ifo economic research institute in Munich, is proposing that the 7 percent reduced VAT rate be completely eliminated, reports Der Spiegel.

All goods and items in Germany should be “taxed uniformly”, with the standard VAT rate currently sitting at 19 percent. Under Fuest’s plan, “All goods currently subject to a reduced VAT rate, especially food, would become more expensive,” although whether or not supermarkets would pass this on to consumers is unclear. 

Under the German VAT Act (Umsatzsteuergesetz), the reduced 7 percent tax rate applies to a wide range of goods and services, from food to public transport, cultural events, hotels and some healthcare items. 

German government to give out annual credits

To counteract the additional burden that this could add to low-income households, especially when food inflation and the rising cost of living are factored in, the government would pay out annual credits to those in need, around 360 euros per year for low-income households. 

This means that the brunt of the change would be “borne by half of the population with higher incomes, i.e. those with gross incomes above approximately 55.000 euros.” 

The German tax reform would help “plug budget gaps” needed by the government. Uniform VAT rates already exist in other countries, for example in Denmark, where all goods are subject to 25 percent VAT.