A Temporary VAT Cut as Unconventional Fiscal Policy
Working Paper 29442
DOI 10.3386/w29442
Issue Date
We exploit the unexpected announcement of an immediate, temporary VAT cut in Germany in the second half of 2020 as a natural experiment to study the spending response to unconventional fiscal policy. We use survey and scanner data on households’ consumption expenditures and their perceived pass-through of the tax change into prices to quantify its effects. The temporary VAT cut led to a substantial relative increase in durable spending of 36% for individuals with a high perceived pass-through. Semi- and non-durable spending also increased. According to our preferred estimates, the VAT policy increased aggregate consumption spending by 34 billion Euros.
Non-Technical Summaries
- When Germany temporarily cut its value-added tax rates, aggregate consumer spending rose by 34 billion euros, mostly on durable goods...