Clemens Fuest, president of Germany’s ifo Institute, wants to abolish the reduced VAT rate.

Clemens Fuest, president of Germany’s ifo Institute for economic research, has explicitly called for abolishing the country’s reduced value-added tax, or VAT, rate of 7% and moving toward a more uniform system. VAT is a nationwide consumption tax.

Germany’s standard rate is 19%, while the reduced 7% rate applies to many foods, books, newspapers, public transportation services, and other selected goods and services. The system includes numerous exceptions and difficult classification rules.

Fuest argues that the reduced rate is not a well-targeted social policy. Low-income households benefit from lower food prices, but households with higher overall spending receive a larger share of the tax benefit in absolute euro terms.

He therefore proposes replacing the broad tax reduction with targeted direct payments to lower-income households. However, absolute and relative effects must be distinguished.

Lower-income households may receive a smaller benefit in euros, but they spend a much larger share of their disposable income on food and other necessities. Without sufficient compensation, abolishing the reduced rate could therefore place a proportionally heavier burden on them.

The effect on consumer prices would also depend on how much of the higher tax businesses pass on to customers. The revenue and relief figures cited by Fuest are model calculations, not guaranteed budget outcomes.