A study commissioned by the German Federal Ministry of Finance and conducted by the Leibniz Centre for European Economic Research (ZEW), according to a report in the “Handelsblatt” suggests that many value-added tax (VAT) exemptions are economically detrimental. ZEW economist Friedrich Heinemann stated that while the reductions for photovoltaic systems, food, and personal transport are relatively well-justified, many other exemptions are “hard to justify nowadays” and are neither “distributionally convincing nor economically sensible”.
The federal government is currently considering raising the standard VAT rate from 19 to 21 percent. The study authors argue that removing these exemptions could help avoid an increase in the standard tax rate. For instance, the report notes that there is “no sustainable justification” for the current VAT reduction in the catering sector, and suggests that the exemption for short-term accommodation services should also be abolished, calling it poorly targeted and “a clear candidate for elimination”. Furthermore, the discounts for culture and entertainment, rehabilitation and health services, and agriculture were deemed insufficiently compelling.
The research indicates that if all exemptions-with the exception of food-were eliminated, the state could generate approximately 14 billion euros more revenue in a year. Conversely, the study suggests that eliminating these exemptions could also create breathing room for a neutral-revenue VAT reduction, stating, “The removal of all discounts with the sole exception of food would allow for a reduction of the normal rate to 18.14 percent”.
Additionally, if all reduced tax rates were abolished, the standard rate could fall from 19% to 16.7%. ZEW economist Daniela Steinbrenner concluded that “curtailing poorly justified exemptions would not only improve the revenue situation but would also significantly reduce bureaucratic costs and demarcation issues”. This ZEW study was commissioned during the tenure of former Finance Minister Christian Lindner (FDP).