What the Ifo Institute's VAT Overhaul Would Cost You at the Checkout

Germany currently applies a reduced value-added tax (VAT) of 7% to most food staples—bread, butter, fruit, vegetables, meat—as well as to hotel stays and public transport. Everything else is taxed at the standard 19%. Clemens Fuest, president of the Munich-based Ifo Institute, is now calling for an end to that two-tier system, arguing that all goods should be taxed uniformly at 19%.

The immediate consequence would be higher supermarket prices. Even if retailers absorb part of the increase, a full pass‑through would lift the prices of currently reduced‑rated goods by roughly 11%. Speaking to the Bild newspaper, Fuest acknowledged that “all goods currently paying the reduced rate—especially food—would become more expensive,” but he also said he did not expect companies to pass the full tax rise on to consumers immediately.

To shield low‑income households, Fuest proposes a yearly cash credit of 360 euros for those with gross incomes below about 55,000 euros. That group makes up roughly the lower half of the population. Higher earners would receive no offset, meaning the reform would effectively function as a progressive VAT surcharge on richer households. After deducting the cost of the credits, the state would still be left with an additional 36 billion euros a year, according to Ifo’s calculations.

Inside Fuest's Arithmetic: Who Foots the Bill and Who Gets the Rebate

Why Germany’s Two‑Tier VAT System Draws Fire

Fuest’s central argument is administrative complexity. The line between 7% and 19% can be arbitrary: a restaurant meal pays 7%, but the accompanying drink is taxed at 19%. A hotel room is subject to the reduced rate, but the breakfast served in the same building is not. These distinctions create legal disputes and compliance costs for businesses, which the Ifo chief calls “unnecessary complexity, demarcation problems and arbitrary unequal treatment.” A single rate would wipe out that frictional cost overnight.

Advertisement

The Distributional Riddle: Who Truly Benefits from the 7% Rate?

The conventional wisdom is that a lower VAT on essentials helps poorer households, because they spend a larger share of their income on food. Fuest flips that argument: since the 7% rate applies to everybody, a significant portion of the forgone tax revenue ends up subsidising the grocery bills of high earners who do not need the relief. By charging a uniform 19% and returning money only to the lower half of the income distribution, his model shifts the subsidy from the well‑off to those below the 55,000‑euro threshold. Critics will note that the 360‑euro credit is a flat sum, meaning a family of four receives the same as a single person, which could blunt its poverty‑reduction effect.

36 Billion Euros and the Political Calculus

The net fiscal gain is substantial—over 36 billion euros annually, roughly equivalent to 0.8% of German GDP. In a period of strained public budgets, that kind of money could plug spending gaps without raising income tax rates. However, making every loaf of bread 11% dearer overnight would be a political earthquake. Fuest’s calculation of 360 euros per low‑income household is designed to neutralise the average extra cost for that group, but many voters will simply see a higher grocery bill before they notice a year‑end credit. Denmark already applies a uniform 25% VAT on everything, showing the idea is technically feasible, but the German debate has barely begun.

What German Households Should Look Out For

  • Check where your household sits relative to the 55,000‑euro gross income line. Fuest’s plan would give the annual 360‑euro credit only to those below that threshold—roughly the poorer half of households.
  • Expect a potential rise in grocery bills of up to 11% on currently reduced‑rated items, though actual price increases could be smaller if retailers absorb some of the tax. A family spending 400 euros a month on food under the 7% regime might face an extra 480 euros a year if the full 19% rate is passed on.
  • For lower‑income households, the 360‑euro credit would offset some or all of that extra cost, but a single person with a modest food budget might come out ahead while a larger family could still feel a pinch, because the credit is not scaled by family size.
  • No action is needed today. The proposal is a policy suggestion from an influential economist, not a government bill. It would require legislation and would face fierce political opposition before it could take effect. Still, any future government looking to raise revenue without hiking income tax may revisit this model.