- Germany’s governing coalition considered raising the VAT rate from 19% to 21% to fund labor tax cuts, but also discussed narrowing the VAT base through a lower reduced rate (4%) or zero-rating food, despite the Finance Minister distancing himself from these proposals.
- While shifting the tax burden from labor to consumption can boost work incentives and broaden the taxpayer base, combining a higher VAT rate with base-narrowing measures (like a 4% reduced rate or zero-rating food) would significantly diminish or entirely eliminate the potential revenue gains for labor tax cuts.
- Instead of eroding the base, broadening it by raising the reduced rate towards the standard rate could generate substantial additional annual revenue (up to €40 billion), providing a more effective means to finance ambitious labor tax cuts and enhance fiscal stability.
Source Tax Foundation
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