Economist proposes scrapping Germany's reduced VAT rate

Economist Clemens Fuest has suggested a significant tax reform in Germany, which includes eliminating the reduced 7 percent value-added tax (VAT) rate. This move aims to increase revenue for the government following the recent permanent reduction in VAT rates in the hospitality sector. Clemens Fuest, the president of the Ifo economic research institute in Munich, is advocating for a uniform VAT rate across all goods and services in Germany, with the current standard rate being 19 percent.

Under his proposal, "All goods currently subject to a reduced VAT rate, especially food, would become more expensive," although it remains uncertain if supermarkets would pass this cost onto consumers. The German VAT Act currently allows for a reduced 7 percent tax rate on various goods and services, including food, public transport, cultural events, hotels, and certain healthcare items.

To mitigate the impact on low-income households, especially considering rising food inflation and living costs, the government would provide annual credits of around 360 euros per year for those in need. This would result in the majority of the change being borne by individuals with higher incomes, specifically those with gross incomes above approximately 55,000 euros.

The German tax reform is expected to help address budget gaps required by the government. Uniform VAT rates are already implemented in other countries, such as Denmark, which applies a 25 percent VAT to all goods.