A VAT rate of 0%? Nice for consumers, but not an effective measure

Peter Kavelaars, Professor of Fiscal Economics at Erasmus School of Economics
Erasmus School of Economics

A VAT rate of 0% for one year. That is what the Dutch political party PVV wants to implement to solve the economic crisis caused by the coronavirus. It would lead to more spending among consumers and would also be beneficial for businesses. Peter Kavelaars, Professor of Economics of Taxation at Erasmus School of Economics, explains why this plan is not as effective as you might think.

The real problem

‘It is, of course, very nice for the consumer, but the point is that the consumer is only saving at the moment. The savings surplus has never been so high', says Kavelaars. 'Therefore, it would not make much sense to give more space there. The real problem lies with employers and entrepreneurs whose burden we have to lighten, and the VAT rate is typically not the right instrument for that.'

Breathing space

Unlike the Netherlands, Germany did adjust both the high and low VAT rates in response to the corona crisis. Nevertheless, Kavelaars believes that this is not a very effective way to solve the economic crisis. ‘There are much better measures for this, and that is mainly to structurally reduce the burden on employers and entrepreneurs.’ According to Kavelaars, we need to reduce the burden on wages for employers. That would immediately reduce wage costs, which would give companies some breathing space.

Ineffective measure

Another disadvantage of lowering the VAT rate is that companies with a strong position in the market could refuse to pass the reduction on to the consumer. In this case, these companies would be able to put this money into their own pockets, which means that it would be a very ineffective measure. Moreover, it is precisely primary goods that are already in the lowest VAT rate, emphasises Kavelaars. ‘And we all know that the food sector is currently doing very well, with sales going sky-high,' says Kavelaars. ‘At most it could be worthwhile to encourage consumers to travel and go to the cafe. And of course that would not work with this measure.’

More information

The full item from BNR Nieuwsradio, 31 August 2020, can be found here (in Dutch). 

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