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The Limits of a Broad VAT Cut: Pass-Through Heterogeneity and Welfare Interpretation

Author

Listed:
  • Michael Barczay
  • Shafik Hebous
  • Tom Zimmermann

Abstract

This paper studies heterogeneity in the pass-through of Germany's temporary VAT reduction in July 2020. Using confidential product-level CPI data, we document substantial dispersion in consumer-price responses: nearly half of standard-rate products show no consumer-price change, while 30 percent exhibit full pass-through. Lower-income households experienced somewhat larger proportional price declines than higher-income households. Using an inverse-optimality consistency test, we show that, once the full revenue loss is considered, the reform cannot be rationalized by any progressive weighting of gains across income groups.

Suggested Citation

  • Michael Barczay & Shafik Hebous & Tom Zimmermann, 2026. "The Limits of a Broad VAT Cut: Pass-Through Heterogeneity and Welfare Interpretation," CESifo Working Paper Series 12922, CESifo.
    • Handle: RePEc:ces:ceswps:_12922
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12922.pdf
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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