Are Temporary Value-Added Tax Reductions Passed on to Consumers? Evidence from Germany's Stimulus

Abstract

This paper provides the first estimates of the pass-through rate of the ongoing temporary valueadded tax (VAT) reduction, which is part of the German fiscal response to COVID-19. Using a unique dataset containing the universe of price changes at fuel stations in Germany and France in June and July 2020, we employ a difference-in-differences strategy and find that pass-through is fast and substantial but remains incomplete for all fuel types. Furthermore, we find a high degree of heterogeneity between the pass-through estimates for different fuel types. Our results are consistent with the interpretation that pass-through rates are higher for customer groups who are more likely to exert competitive pressure by shopping for lower prices. Our results have important implications for the effectiveness of the stimulus measure and the cost-effective design of unconventional fiscal policy.

Keywords: COVID-19, Pass-Through, Stimulus, value-added taxes

JEL Classification: E62, H22, H32