Clemens Fuest: Why a progressive value-added tax helps Germany

Germany's government finances are currently under pressure, requiring all spending and tax breaks to be scrutinized. Redistribution aims should only be maintained if they are precise and target those who genuinely need assistance. This objective is not met by the current value-added tax (VAT) system. While the standard VAT rate is 19 percent, an 7 percent reduced rate is applied to food and many other goods.

This dual-tiered structure complicates the tax system and increases administrative costs. The justification is that low-income individuals spend a significant portion of their income on food, thus benefiting from the reduced rate. However, the reduced rate benefits all consumers and applies to numerous goods, not just food. Additionally, households gain more as their consumption increases.

The reduced VAT rate costs the state 43.5 billion euros annually. While the goal of social policy relief could be achieved with less effort, households in the lower half of the population spend about 250 euros per month on food and alcohol-free beverages. Consequently, this reduced rate relieves these households by 30 euros per month, totaling 7.2 billion euros per year for the entire economy.

If this relief is the true objective, direct transfers to households could be a more effective solution.