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

Michael Barczay, Shafik Hebous and Tom Zimmermann

No 12922, CESifo Working Paper Series from CESifo

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.

Keywords: VAT; tax incidence; fiscal stimulus; pass-through (search for similar items in EconPapers)
JEL-codes: H21 H22 H23 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12922

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