Experts call for reform of the VAT – Economy

Experts call for reform of the VAT – Economy

The President of the Ifo Institute, Clemens Fuest, calls on politicians to reform the sales tax law. “A uniform VAT rate of 16 percent would be the best solution,” said Fuest South German newspaper. “Economically speaking, this patchwork quilt is… VAT only damage, there are huge delimitation problems, just remember that the VAT rate for coffee depends on the milk content, and that then leads to legal disputes.” Fuest said that the many exceptions open the door to lobbying. “If Once politics has given in to one interest group, the next ones are immediately on the mat.”

The tax chaos that has been growing for years is upsetting many people, but those who benefit from a reduction remain calm. It’s getting louder the other way around: The federal government’s recent decision to increase the VAT on food in restaurants and cafés from seven percent back to 19 percent at the turn of the year led to sharp protests – in the affected catering industry, while large parts of society hardly noticed the dispute. “The costs of these exceptions for particular interests are so widely distributed that hardly anyone notices and screams, even though politicians here specifically privilege their voter groups without thinking about the common good,” said Fuest.

Federal Audit Office describes a reform as “long overdue”

But politicians don’t dare to tackle the issue. The Federal Audit Office also describes the reform of the sales tax in one report as “long overdue””The application of the reduced sales tax rate leads to an annual tax benefit of almost 35 billion euros,” the experts write in 2022. They point to the tight state budget: Restricting the catalog of reduced-taxed services brings in additional revenue that is urgently needed to consolidate state finances.

If a drink consists of at least 75 percent milk, it is only taxed at seven percent. The full VAT rate applies to milk substitute products.

(Photo: Florian Peljak)

In Germany, the standard rate for VAT is 19 percent, the reduced rate is seven percent. The terms VAT and sales tax are often used interchangeably. The former is more familiar to consumers, the latter to entrepreneurs who claim their sales tax payments as input tax to the tax office when purchasing. The issue at hand is the question of which goods and services receive seven percent and which receive 19 percent – or nothing at all: Germany abolished the stock exchange sales tax in 1991. Motto: VAT applies when you eat, but not when you speculate.

In its report, the Federal Audit Office has mercilessly listed the strangest cases of sales tax that are sometimes reduced and sometimes due in full. Hot coffee with a dash of milk: 19 percent sales tax. Frothed milk with an espresso for a latte macchiato: seven percent sales tax. Latte macchiato made from plant-based milk substitutes such as soy milk instead of milk: 19 percent sales tax. Fresh fruits are taxed at a reduced rate. However, if the fruit is pressed into juice, the general tax rate applies.

Leaves, twigs, grasses and mosses that are used for binding or ornamental purposes and are fresh are subject to the reduced tax rate. However, this does not apply if the components mentioned have dried. Seven percent sales tax is therefore due on Christmas decorations made from fresh branches. If, on the other hand, it consists of dry branches, the figure is 19 percent, according to the Federal Audit Office.

Sanitary pads and tampons are taxed at a reduced rate, but diapers for babies and small children are subject to the general tax rate. Certain medical products such as body replacement parts, artificial joints, orthopedic devices or pacemakers are subject to reduced taxation. However, the general tax rate applies to prescription drugs.

For reform, all parties would have to pull together

One idea would be to eliminate all discounts. But those affected would protest. “A lot of education is needed so that people don’t see this as a tax increase maneuver,” warns Friedrich Heinemann, professor of economics at the ZEW Leibniz Center for European Economic Research in Mannheim. “It is therefore important for a major VAT reform to have a consensus among the democratic parties. Everyone would have to pull together and explain this to the public, and the opposition must also take responsibility,” says Heinemann, who criticizes the fact that the opposition Union is approving of this debate Score points and fraternize with the lobbies. “This is a tragedy for a large state-supporting people’s party that always claimed to think in terms of regulatory policy. This also contributes to the frustration with politics.”

A reduction in VAT is often justified by the fact that it benefits the end consumer. “However, this effect is not guaranteed because entrepreneurs cannot be legally obliged to pass on the VAT rate reduction to the service recipient,” said the Federal Audit Office. It should therefore always be checked whether direct funding and transfers would be a better option instead of a subsidy.

“The idea with a uniform 16 percent rate would be revenue neutrality. The state would not have more or less. However, the tax administration could reduce costs in tax audits and the processing of tax returns,” says Heinemann. But unions warn of the social consequences. “Of course there is the distribution effect. If you reduce the VAT, the rich and the poor benefit, and if the VAT on goods that are now taxed at seven percent is raised to 16 percent, households with less income will be more burdened,” says Fuest . The state then has to compensate for this through money transfers. “Recipients of citizens’ benefit automatically receive compensation for the more expensive food, because legally speaking, the subsistence minimum must always be covered. For incomes above that, a slight income tax reduction could help.”

The Court of Auditors warns that difficulties in delimitation and contradictions in the reduced VAT rate give entrepreneurs incentives to cheat and falsely offer services at the reduced tax rate. For this reason too, courts always have to get involved. But there doesn’t have to be fraudulent intent to call the judges, for example in the case of swimming pool sales. The equipment with which the swimming pool (reduced tax rate) becomes a fun pool (general tax rate) must be clarified regularly. In the hotel industry, too, there are sometimes piquant difficulties in delimitation: the Federal Finance Court had to decide in several judgments that renting rooms to a prostitute in a brothel does not meet the requirement of renting living rooms and bedrooms for short-term accommodation – and therefore full VAT applies is paid.

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