Economists argue about the effect of the VAT cut

A study by the union-affiliated IMK Institute comes to the conclusion that the temporary tax relief does not trigger a buying frenzy. The German Business Institute, which is close to the employer, presented different results.

In order to contain the economic consequences of the corona pandemic, a lower value added tax has been in effect since July 1st - until the end of the year.

AEven after the temporary VAT cut began, experts argue about its positive effect. A study by the IMK Institute of the union-affiliated Hans Böckler Foundation comes to the conclusion that the temporary tax relief hardly leads to more consumption. “A different weighting of the measures in the economic stimulus package – such as a higher child bonus or a more generous increase in short-time working allowance – would have led to a greater economic stimulus according to these results,” the researchers concluded on Monday.

According to an analysis by the employer-related Institute of the German Economy (IW), on the other hand, 1.7 million people recently went shopping precisely because of the tax relief. “The VAT cut is having an effect and is helping retailers in particular to overcome the crisis,” said IW Director Michael Hüther.

The federal government reduced the value added tax from 19 to 16 percent from July to the end of 2020. This is intended to boost private consumption and boost the economy, which has been weakened by the corona pandemic. This should cost around 20 billion euros – almost half of the financial volume from the economic stimulus package, which according to the IMK will take effect in 2020. Around 4.3 billion euros are earmarked for the child bonus of 300 euros per child, which is paid out in September and October. According to the IMK survey of a good 6,300 workers, almost 75 percent of consumers do not want to change their consumption behavior in the second half of 2020 despite the lower tax.

40 percent more passers-by in the city centers

“Olaf Scholz’s sales tax boom was a sparkler that burned off before the New Year,” criticized the deputy chairman of the Left parliamentary group, Fabio De Masi. In order to support companies, he advocated direct aid for small businesses and the self-employed. In addition, at the turn of the year there is now a threat of rising prices in a critical phase of the economy. “The billions would have been much better invested in higher short-time work benefits or a longer child bonus.”

The IW Institute assumes, however, that the tax incentive has increasingly lured people in Germany to the shopping streets. The Cologne researchers evaluated data from the company Hystreet, which uses laser technology to count passers-by in 41 particularly busy street sections in 21 German cities – for example in Cologne’s Schildergasse or on Hamburg’s Jungfernstieg.

Accordingly, there were 27.2 million pedestrians in July, 4.2 million more than in June. “The results suggest that around 40 percent of the additional passers-by in the cities examined can be traced back to the VAT reduction,” said IW study author Henry Goecke.

However, it remains to be seen whether this will also help retailers to overcome the corona crisis in the long term – and whether the trend will continue in the coming months. “When it comes to economic policy measures, it is important that they start at the right time at the right time and that they are limited in time,” emphasized IW Director Hüther. “That is the case here.”