Inflation is high, with food prices rising by around 21% between November 2021 and November 2022. To ease the burden on households, Germany is debating a reduction in value-added tax (VAT) on certain foods. German Agriculture Minister Cem Özdemir has repeatedly called for the abolition of VAT on healthy food. The German Environmental Agency (UBA) and the interest group of the Federation of German Consumer Organizations (VZBV) are also calling for the abolition of VAT on plant-based foods.
Basic foodstuffs are taxed at a reduced rate of 7%. The VAT rate for other products is 19%. UBA head Dirk Messner estimates that a VAT exemption for fruits, vegetables, grain products and vegetable oils could save private households about €4 billion ($4.3 billion) a year.
Who benefits from a reduced VAT rate on food?
However, not everyone would benefit equally from the measure. Compared to wealthier households, lower-income households spend a relatively large percentage of their income on food. They would benefit more from a VAT reduction on food.
But even high-income people would pay less for food, according to Sebastian Dullien of the Hans Böckler Foundation. “French cheese at the deli for € 5.99 per 100 grams would be about 40 cents cheaper, while packaged Gouda cheese that costs 60 cents per 100 grams in the supermarket would be only 4 cents cheaper,” says the economist. In absolute terms, people with higher incomes can save more, but not necessarily in proportion to their total income.
Wealthy households spend up to twice as much on food in absolute terms compared to lower-income households because they consume more expensive, higher-quality food, says Stefan Bach of the German Institute for Economic Research (DIW).
‘Too late decision’
In addition to providing financial relief, lower prices on certain foods are also intended to steer people away from buying meat and vegetables. Ideally, a VAT reduction would increase the incentive for a healthy and sustainable diet by making fruit and vegetables cheaper, especially compared to animal foods, including meat, says Anne Markwardt of the VZBV.
“Even though many people in Germany don’t like to hear it, we need to consume a lot less meat and other animal products,” said DIW chairman Marcel Fratzscher, who added that from a social, environmental and health perspective, a German government has decided to cut the tax. about the added value on vegetables, fruits and grains is important and should have been long overdue.
Lower prices could also help organic food at a time when health food stores and shops selling high-quality organic products are suffering from a huge drop in sales, says Joachim Rukwied, head of the German Farmers’ Union (DBV). The current trend is to buy organic foods from low-cost supermarkets, he adds, which in turn has made many farmers think about transitioning to organic farming.
Will prices really fall?
Businesses 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. However, given the high inflation, energy and other costs, he doubts that companies will quickly pass on any VAT reductions in the short and medium term.
A look at a temporary VAT reduction in 2020, when the regular VAT rate was reduced from 19% to 16% for six months and the reduced rate dropped from 7% to 5%, gives an indication of how businesses are responding to VAT amendments.
According to a study by the German Bundesbank, 60% of the tax cut was passed on to customers in the economy as such; 70% to 80% was passed on in the food sector, according to researchers at the Ifo Institute in Munich.
However, the situation was different then: the VAT reduction did not only apply to foodstuffs, inflation was not what it is today and it was clear from the start that the tax reduction was temporary. That is why it is difficult to predict the effect of a VAT reduction, says DIW expert Bach, adding that there is relatively little data available because value-added tax has not been around for very long and is raised rather than reduced when it is has changed in the past.
Experts can estimate how much money the state is missing out on. Currently, levying 7% VAT on food generates a turnover of around 15 billion euros per year, says Bach. “That revenue would be lost and would have to be offset by other revenue or the deficit would widen further.”
Without the VAT money, there will be no money for important projects in the coming years, including infrastructure renewal, strengthening the education system and decarbonisation, warns Dullien of the Hans Böckler Foundation.
Exempting fruit and vegetables from VAT promotes healthy eating and saves costs in the long term, for example in healthcare, argues Anne Markwardt of the VZBV.
A VAT reduction would also have a small effect on inflation. Foods account for nearly 10% of the basket of goods used to measure inflation in 2022, according to Germany’s Federal Statistical Office. The measure could reduce inflation by an estimated 0.6% to 0.7%, Bach says.
Temporary VAT reductions in Spain
While the debate is ongoing in Germany, some countries, including Poland and Turkey, have reduced VAT on food, including meat, by 2022.
In Spain, VAT on basic foodstuffs such as fruit, vegetables, bread and milk was abolished from January 1, 2023 — meat and fish are exempt, initially for six months. Prices have fallen as a result, but Spain’s consumer protection organization FACUA also reported seven retail chains to the country’s National Competition Commission in the first week of January for failing to pass on price cuts to shoppers.
This article was originally written in German.