The Price Effects of the Reduction in Value Added Tax in German Supermarkets: An Analysis of More than 60,000 Products

The reduction in value-added tax from July 1 to December 31, 2020 is the most important measure of the economic stimulus package adopted in June of this year. The standard rate has been reduced from 19 to 16 percent and the reduced rate from 7 to 5 percent. The effects of this measure depend crucially on whether the reduction is passed on to consumers in the form of lower prices. We analyze the price development of more than 60,000 products in supermarket retail. Our analysis shows that the tax reduction has led to an average price reduction of 2 percent, which corresponds to a complete passing on of the tax reduction. We also show that the tax reduction has led to greater price reductions in product groups with higher competitive intensity.