Selling argument: reference to a reduction in VAT on a receipt
Photo: Rolf Vennenbernd / dpa"That was not easy for anyone," said Olaf Scholz. "Nobody likes to do that, whether before or after election campaigns, it remains difficult when you raise taxes."
At that time it was June 2006 and the grand coalition had just decided to increase VAT from 16 to 19 percent. That was the strongest increase since the tax was introduced (see graphic) - and a contradiction of the SPD election campaign, in which the party had rejected the increase with the slogan "Merkel tax, that's going to be expensive".
In terms of taxes, things could soon be hairy again for Scholz, who has been his party's chancellor candidate since last week. As Federal Minister of Finance, at the beginning of July, he was responsible for the first reduction in VAT since it was introduced over 50 years ago. But it is limited to help against the corona crisis until the end of the year. At the beginning of 2021, in the election year of all places, the tax should rise to its previous level. At least that's the plan.
But will it also be implemented? Or is politics moving away from the increase out of fear of electoral displeasure? Scholz himself has repeatedly assured that he wants to hold on to it. After all, citizens should now be encouraged to consume in order to help the ailing economy. Without a time limit, however, a central incentive would disappear.
SPD parliamentary group leader Rolf Mützenich did not rule out an extension of the time limit from the outset. And business representatives drum for it anyway. The designated head of the BGA foreign trade association, Anton Börner, said he would have "preferred a year or a year and a half, also because the switch to the lower rates has cost the economy time and money".
As the election approaches, such calls could get louder. Especially if the historically difficult situation in the German economy has not improved significantly by then. And even if the upswing should be clearly visible by then, the question will arise: Do you want to stifle an economic recovery with a tax increase? Bavaria's Prime Minister Markus Söder (CSU) - a possible Scholz competitor in the race for the Chancellery - has already spoken out in favor of a longer-term VAT reduction in the catering trade.
But would a prolonged or even permanent reduction also make economic sense? And what has the step actually brought so far?
Saving precaution instead of spending spree
Individual industries are reporting increased demand in connection with the tax cut - especially for more durable goods such as furniture. Overall, the initial feedback sounded cautious. The retail association HDE reported that only 13 percent of companies outside the grocery trade saw the tax cut as an effective way of stimulating consumption.
"So far there doesn't seem to be any greater buying impulses," says Stefan Bach, tax expert at the German Institute for Economic Research (DIW). "However, it is still vacation time, so you should wait another month."
In addition to the holidays, worries about the future could also deter Germans from bigger shopping trips. Your savings rate, which is already high by international comparison, rose to a historic high of a good 16 percent in times of the corona crisis. "We see that precautionary saving is very much in vogue," says Marco Wagner, an economist at Commerzbank. "That could increase if we experience a second wave of infections in autumn." The reduction in VAT would then probably fail to achieve its purpose, which, according to the coalition resolution, is to "strengthen domestic demand in Germany".
The HDE has already criticized that the government could have triggered a greater impetus if it had put the around 20 billion euros for the VAT cut and the around four billion euros child bonus in consumer vouchers with an expiration date and personal contribution. This would have "at least ensured that the money does not end up in savings accounts". Vienna is currently testing this approach. In June, almost 950,000 vouchers for restaurant visits worth a total of 40 million euros were sent to the citizens of the Austrian capital. A good third of this had been redeemed by the beginning of August.
No more rolls, but cheaper ones
However, the German VAT cut would not have an effect even if it did not lead to any additional consumption. The Germans probably no longer buy bread rolls because they have saved a few cents, as the Federal Audit Office boss Kay Scheller criticized in relation to SPIEGEL. But they pay less money for their usual rolls.
This is because companies seem to have passed a considerable part of their savings on to customers so far. This is indicated by the inflation figures for July, the first month with lower VAT. "In July 2020, numerous goods were cheaper than in June 2020 due to the passing on of the VAT reduction," writes the Federal Statistical Office.
The prices for food fell by 2.7 percent compared to the previous month, while energy was 0.7 percent cheaper despite rising oil prices. Overall, prices fell by 0.5 percent compared to June and by 0.1 percent compared to the same month last year - the first negative annual inflation in a good four years.
According to statisticians, the exact influence of the tax cut is difficult to quantify because the price development depends on many factors. Commerzbank economist Wagner, however, dares to make an estimate based on the core inflation rates and the share of VAT-liable products and services in the statisticians' basket. According to this, around two thirds of the price reductions have so far been passed on to consumers.
Some companies need every euro
The remaining third would not simply have fizzled out either. "If a tax cut does not lead to falling prices, that does not mean that it cannot have any economic effect," says an analysis by the Ifo Institute. "It can even be desirable in times of crisis that the relief benefits the company."
Some of the companies are bagging the tax advantage themselves, which the federal government has taken into account. Restaurant operators or hairdressers, for example, had no income for weeks due to the corona restrictions. Because distance rules and other requirements continue to apply to them, they can now only use the VAT cut to a limited extent to expand their business.
Your industry needs "every euro that we can save through the tax cut", Ingrid Hartges, general manager of the hotel and restaurant association Dehoga, recently told "t-online". This attitude is also reflected in the inflation figures: Despite the reduction in VAT, Germans had to pay 4.9 percent more at hairdressers than in the same month last year, while in restaurants, cafes and street sales the figure was 1.6 percent.
An extended VAT cut could also possibly be justified as a contribution to saving the company. However, it would be a poorly targeted measure, as the Ifo researchers continue to write. Because "those companies that are currently generating high sales and actually belong to the winners of the crisis, for example large supermarket chains such as Lidl or Aldi as well as the currently booming online trade, could benefit most."
Of course, consumers would also benefit - especially those with little money, because consumption accounts for a higher proportion of their income. "In any case, a reduction in value added tax relieves lower and middle incomes more than a reduction in income tax," says DIW economist Bach. In the current crisis, the tax cut also has a comparatively strong effect. "In times of boom, a reduction in value is less passed on. Now is the opportunity - in the deepest recession in living memory."
According to several studies, however, tax increases are even more reliable than tax cuts among consumers. Researchers from the union-affiliated IMK Institute recently pointed this out to the Finance Committee of the Bundestag. One example is the controversial reduction in the VAT rate for hotels in 2009 - better known as the Mövenpick tax.
According to a 2016 study, hotels passed the subsidy on to their customers far less often than a general tax increase two years earlier. "Tariff increases are passed on almost completely, while prices are only reduced to a very small extent after the tariff reduction," is the conclusion of the researchers. An experience that could repeat itself in a few months.
Icon: The mirror