According to a study commissioned by the Federal Ministry of Finance and conducted by the Leibniz Center for European Economic Research (ZEW), many Value Added Tax (VAT) exemptions are economically detrimental. While the reduced rates for photovoltaic systems, groceries, and personal transport are considered to have relatively sound justifications, ZEW economist Friedrich Heinemann stated that many other exemptions are “hardly justifiable today” and are neither “distributionally convincing nor economically sensible”.
The federal government is currently reviewing a potential increase in the standard VAT rate from 19% to 21%. The study authors suggest that eliminating these exemptions could help avert such a standard rate hike. For instance, the study argues that there is “no sustainable justification” for the VAT reduction applied to restaurants, nor should exemptions for short-term accommodation services be maintained, labeling it “a clear candidate for abolition” due to its lack of specific focus. Reductions for culture and entertainment, rehabilitation and health services, and agriculture were also deemed less persuasive.
If all exemptions were scrapped with the exception of basic foodstuffs, the state could collect approximately 14 billion euros more in revenue. Furthermore, the study noted that ending these tax breaks could open up possibilities for a revenue-neutral VAT reduction. Specifically, “the elimination of all discounts with the sole exception of food would allow for a lowering of the normal rate to 18.14 percent”.
If all reduced tax rates were abolished entirely, the standard rate could potentially decrease from 19% to 16.7%. ZEW economist Daniela Steinbrenner added that curbing poorly justified exemptions would not only improve the state’s income but would also significantly reduce administrative costs and definitional difficulties. The ZEW study was commissioned during the tenure of former Finance Minister Christian Lindner (FDP).
