On 29 March 2023, the Dutch cabinet shared research on the effects of introducing a zero-rate VAT on vegetables and fruit with the House of Representatives. The cabinet had commissioned this research following the ambition expressed in the coalition agreement to make vegetables and fruit more affordable. The research shows that a zero-rate VAT is costly and has little effect. Ilona van den Eijnde, a researcher at Erasmus School of Law, has been aware of this for years, and while the report is not ground-breaking, it can serve as an instrument in similar VAT discussions.
Raising or lowering the tax on certain products may initially seem easy to encourage or discourage people from buying certain products. However, in practice, raising or lowering the tax does not always lead to an increase or decrease in the price of a product or even to behavioural change. “I do not believe that steering consumer behaviour through tax legislation cannot be effectively achieved. However, I believe the government should reflect more often and extensively on the 'Integraal Afwegingskader', which asks to justify the 'best instrument'. This does not always have to be a tax measure”, says Van den Eijnde.
Why does tax not always serve as a tool?
The Central Planning Bureau (CPB) published a critical report on using tax laws as a policy instrument on 28 March 2023. “We must realize, in light of the recent CPB report, that using taxes to steer behaviour should not be deemed holy. For now, however, the government seems to do so”, Van den Eijnde states. According to her, there are two clear reasons why tax does not always serve as an instrument: “Using tax measures as a means to achieve a steering goal is structurally difficult because tax measures always have a budgetary goal (raising funds for the national budget) alongside a steering goal. These objectives can conflict with each other regarding choices for the height of a rate, exemptions, or other elements of the structure.” A second complication in using primarily indirect taxes [such as VAT, ed.] to steer behaviour is the ‘playing through the band’ effect. Indirect taxes are costs for companies, and while it is 'intended' that companies pass these costs on one-to-one to consumers who buy the taxable products or use taxable services, this is not a legal obligation. This means that companies can also pass on these costs to other non-taxable products with, for example, a higher price elasticity.”
Should the government then stop using taxes as a policy instrument? According to Van den Eijnde, this is also more nuanced: “I believe that tax legislation in combination with other measures can be more effective than 'stand-alone' tax legislation. One could think of normative measures, such as prohibitions or restrictions, other pricing measures such as a minimum unit price, but also (non-fiscal) subsidies to stimulate desired behaviour.”