War the VAT cut from July to December last year just an expensive show – or a very effective instrument to stimulate private consumption in the corona crisis? Back then, did people even care how high the tax was when the pandemic and corona measures dominated their lives? These questions are still preoccupying economists ten months after the end of the project.
Immediately after the tax was raised again in January, Clemens Fuest, the President of the Munich Ifo Institute, drew a sobering conclusion based on Forsa surveys among 30,000 citizens: The tax cut brought 6.3 billion euros in additional consumption – but these were still there disproportionate to the costs of 20 billion euros.
Now a group of economists led by Rüdiger Bachmann from the American University of Notre Dame has dealt in detail with the topic again for a working paper – and has come to almost contradicting results. The authors themselves blame the better data situation today.
In their study “A temporary VAT cut as an unconventional fiscal policy”, they state that the tax cut made many people prefer to buy durable consumer goods at the time. In the difficult period of the second half of 2020, this noticeably supported private consumption – the authors estimate the overall effect on consumption at 34 billion euros.
Four large data sets evaluated
The authors do not go long on the question of whether the VAT cut was passed on from companies to consumers at all. Scientists working with economic expert Monika Schnitzer had discovered last summer that only 61 percent of the tax cut had been passed on for gasoline, for example, and 83 percent for diesel.
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The Ifo Institute had compared the development of the prices of 60,000 products from the supermarket chain Rewe with that of its Austrian counterpart Billa and came to the conclusion that the tax cut had been passed on in full. The Bundesbank assumed a 60 percent transfer across all sectors.
The authors of the new working paper now concentrated on the question of whether and how this stimulated consumption. To do this, they use four data sets: two Bundesbank surveys, one from July 2020, which asked about people’s spending plans for the second half of 2020, and one from January 2021, in which, in retrospect, their spending on durable consumer goods during this period were queried. This was supplemented by a special survey by the Society for Consumer Research on this very question and a data set on the actual expenditure of Germans on short-lived and consumer goods, determined via scanners.
Clear result across all surveys
One difficulty in calculating the consequences of the VAT cut is now that there is a lack of comparison groups from which one could see how people would have behaved without the tax cut – because everyone is affected by it. In determining how the tax cut would be passed on to consumers, the economists used prices from other countries in which there was no tax cut.
Bachmann and his co-authors are now using a different trick: In the surveys before the tax cut, they compare the consumption plans of people who did not know that the tax would be raised again later with those of those who were fully informed. And in the post-tax polls, in which households retrospectively report their spending, they compare the responses of those who felt the tax cut had been passed on with those who felt the opposite. In each case, they wanted to isolate how awareness of a lower tax affects spending.
In all cases it was found that those interviewed who knew about the tax path, i.e. lowering and increasing taxes, had significantly more consumer spending than the others. That was the clear result across the four surveys, it said. What exactly people bought more, such as cars or furniture, is not discussed. However, an attempt was made to isolate the results from other conceivable influencing factors. There were no indications that the pandemic itself, measured in terms of regional incidence, was important for how the results turned out.
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