Economist proposes scrapping Germany's reduced VAT rate

Economist Clemens Fuest has suggested major tax reforms in Germany, including the elimination of the 7 percent reduced value-added tax (VAT) rate. This shift would generate additional government revenue. The proposal, brought up after a recent VAT rate reduction in the hospitality sector, aims to "tax all goods and items uniformly" in Germany, as per the standard VAT rate of 19 percent.

According to Fuest, all goods currently enjoying the reduced VAT rate, particularly food, would become more expensive. However, it remains uncertain whether supermarkets would pass these increased costs onto consumers. Under his tax plan, the government would provide annual credits to low-income households, amounting to roughly 360 euros per year to mitigate the added burden due to food inflation and the rising cost of living.

The German VAT Act (Umsatzsteuergesetz) currently applies the reduced 7 percent tax rate to a broad range of goods and services, including food, public transport, cultural events, hotels, and certain healthcare items. The proposed tax reform would primarily affect households with higher incomes, particularly those earning approximately 55,000 euros or more.

Uniform VAT rates are already practiced in other countries, such as Denmark, where all goods are subject to a 25 percent VAT.