The aim of this project is to investigate allocative and distributive effects of an abolition of the reduced VAT tax rate. The allocative and welfare effects of abolishing the reduced VAT tax rate will be investigated and it will be examined whether and how much high and low income households are affected differently. In addition, alternatives of compensating the more adversely affected house will be shown. The investigation will include calculating the necessary level of compensation for these households and the additional tax revenues remaining for a reduction of tax rates.