Back to 19 per Cent VAT in the Food Service Industry
ResearchPhasing out the seven per cent taxation makes economic sense and is socially just
During the COVID-19 pandemic, the value added tax (VAT) rate for the food service industry was temporarily reduced from 19 to seven per cent. This subsidy that entails annual tax losses of three billion euros is due to expire at the end of 2023. A ZEW analysis now shows that the return to 19 per cent taxation makes economic sense and is socially just, because challenges such as structural change, inflation and labour shortages affect other sectors just as heavily.
“With the end of the pandemic, the original crisis-related justification for the seven per cent taxation of food in restaurants is no longer applicable. The expectation that there would be a jump in prices to the full extent of the tax rate differential if the temporary tax subsidy ended as planned is not plausible. After all, the industry has pushed through considerable price increases despite the tax privilege and the prices for electricity and gas are declining,” explains Friedrich Heinemann, Head of ZEW’s “Corporate Taxation and Public Finance” Research Unit. “As a result, the arguments put forth for the indefinite extension of the seven per cent tax rate in the food service industry are not convincing. The post-pandemic period imposes a further structural change on the gastronomy sector, as it does on others, but does not justify a permanent subsidy”, adds Katharina Nicolay, Deputy Head of ZEW’s “Corporate Taxation and Public Finance” Research Unit.
When it comes to structural change, the food service industry is not a special case
Advocates of maintaining the reduced VAT rate often argue that such assistance is necessary in view of the labour shortage in this sector. “However, the German economy is facing a growing labour shortage across the board and in all sectors. Subsidising certain sectors at will is not a feasible solution to this extensive problem,” explains Friedrich Heinemann. “It is also hard to understand why, for example, the labour shortage in the food service industry should be a more serious problem for the German economy than in the skilled trades or in retail. Labour shortages must be addressed comprehensively for all sectors through measures such as education policy, a targeted migration policy and work incentives in the tax and transfer system.”
Wealthy households benefit the most
If this subsidy favoured less wealthy households, arguments of distributional policy could be justified. “Empirically, the opposite is the case, because this tax concession actually disproportionately favours wealthy and childless households,” says Katharina Nicolay. “In terms of providing relief for poorer households, only tax reductions for food service in schools and kindergartens could be considered targeted aid.”
