The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail

45 Pages Posted: 24 Jun 2021

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Florian Neumeier

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Daniel Stöhlker

CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2021

Abstract

On 3 June 2020, the German government announced a temporary value added tax (VAT) rate reduction. VAT rates were reduced on 1 July 2020 and went back to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction using a web-scraped data set covering the daily prices of roughly 130,000 supermarket products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only about half that size. We also study the link between tax incidence and the intensity of competition. Pass-through of the VAT reduction was higher in product groups with a large number of competing products. We rationalize this finding by analyzing consumption tax incidence in the ‘love of variety’ model of consumption.

JEL Classification: E310, H220, H250

Suggested Citation

Fuest, Clemens and Neumeier, Florian and Stöhlker, Daniel, The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail (2021). Available at SSRN: https://ssrn.com/abstract=3872388 or http://dx.doi.org/10.2139/ssrn.3872388

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Florian Neumeier

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Daniel Stöhlker

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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