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German COVID-19 VAT rate crisis cut worked?

€26bn net gain to the economy during lockdown as standard rate cut from 19% to 16% in 2nd half of 2020

German’s controversial six-month 3% standard VAT rate cut to 16% may have worked contrary to received views by economists and VAT thought leaders. The rate was in place between July and the end of December 2020.

According to a study by National Bureau of Economic Research concluded that it boosted consumer spending by €34billion versus an estimated loss in revenues of just 7billion – a €26billion. Most of the spend by householders went on cars, furniture and appliances as the report said “We find that Germans substantially increased their consumption expenditures, especially on durable goods.”

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VAT cuts – nice politics; dodgy economics?

At the time the announced German VAT rate cut between July and December 2020, many commenters. The case for crisis VAT cuts to stimulate demand in an economic crisis appears sound at first blush. As a tax on the consumer, prices should drop in line with the tax cut. This then encourages shoppers to go out – a vital requirement as the high-street reopens – and spend more.

However, this generally does not happen. The UK’s financial crisis VAT rate cut from 17.5% to 15% in 2009/10 led to an initial uptick in consumption. However, this quickly vanished, with no discernible net economic benefit once the reduction in tax revenues was taken into account. In France in 2009, restaurants were given a VAT rate cut from 19.7% to 5.5%. But prices only dropped by 40%; the balance was held back by businesses owners.

Many other studies show VAT rate changes have an asymmetrical tendency: rises are passed on to the consumer whilst cuts are retained by the vendor.

Read more about German VAT in our national guide.

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