Take a close look at your advent wreath. Was is made out of dried leaves when you bought it or did you opt for a fresh one? You might ask whether this is anyone’s business but your own. Well, apparently the German tax office wants to know. This is because, under German tax law, in the former case the regular value-added tax rate (19 per cent) applies, while in the latter the lower rate (7 per cent) is charged. Given that the tax authorities are fully aware of how resourceful would-be tax avoiders can be, in this case they have decided to take firm precautionary measures. Therefore, according to the Federal Ministry of Finance, dried moss cannot become fresh moss again, even if you add water, at least for tax purposes.

And, if you can believe it, this is far from an isolated case. Dog food is taxed at 7 per cent, baby food at 19 (perhaps this is the reason for Germany’s low birth rate..!). Do you know why the artificial insemination of animals is taxed at 7 per cent rather than the standard rate? I don’t either.

In all seriousness, the numerous exceptions to the standard VAT rate are generally the result of successful lobbying efforts on the part of single-issue associations and institutions who have worked out how to harness our political processes for their own interests. When this happens, there is never any talk of subsidies. Rather, the routine justification given by such groups is the potential threat of job losses due to similar goods and services in neighbouring countries being subject to lower tax rates. For instance, Bavaria’s ski-lifts were supposedly under threat from fierce competition in Austria and Switzerland and, as a result, in recent years have been taxed at the reduced rate. The same applies as of this year to the hotel trade, with arguments flaring up over what constitutes an overnight stay; definitely not breakfast and let’s not even talk about other “services” provided by certain “hotels”. Applying a reduced rate to foodstuffs would gain the most public sympathy given that a disproportionately high share of household spending in low-income brackets goes on food. However, such a reform would be largely pointless. Of the 23 million euros in tax losses due to the reduced VAT rate, 17 million can be attributed to foodstuffs. Apart from this, we would also be left with the often ridiculous arguments over which goods count as foodstuffs and which do not.

With all this is mind, the German Council of Economic Experts has proposed a sweeping change to the tax code, which would entail scrapping the reduced valued-added tax rate entirely and at the same time lowering the standard rate from 19 to around 16.5 per cent. Combined, these two changes should go ahead without out any far-reaching effects on revenue. In order to take the wind out of the sails of the expected outrage over the apparent bottom-up redistribution and the unacceptable additional burden on low-income households, the council has also presented calculations based on the most recent data from EVS (income and consumer data sample for Germany) for the year 2008. The results are somewhat surprising. On average, the VAT burden as a percentage of net household income remained practically unchanged across all ten income deciles. The redistribution effects also proved to be limited, with the lowest income bracket only losing a maximum of five euros a month. It remains to be determined whether this result holds for certain socio-demographic groups, such as households with numerous children. If not, compensation payments to these exceptional groups would have to be considered.

Date

06.12.2010

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