The Pass-Through of Temporary VAT Rate Cuts in German Supermarket Retail

On 1 July 2020, value added tax (VAT) rates were reduced in Germany to fight the economic consequences of the Corona pandemic. The VAT rate reduction was only temporary, though, and rates went up to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction in German supermarket retail using an extensive web-scrapped data set covering the daily prices of roughly 130,000 products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only
about half that size. We also document that the pass-through of the VAT reduction was higher in highly competitive product markets.