Increase of the Value Added Tax (VAT) on food products: budget and welfare effects for consumers

On January 1^st 2007, German VAT was increased from 16% to 19% – the regular 7% tax on food remained untouched, however. Since then, this 7% tax has been subject to many debates, primarily regarding the effect it would have on different German household groups should the tax in be increased.

Looking at price elasticity models and using data from 11,831 German households, the study confirmed that low-income households and households with children will have a comparatively high welfare loss.

From this study we can see the impact of any tax increase on food products. Food taxes are regressive, and a tax that raises the price of food and beverage products would disproportionately hit the living standards of lower-income households.

The study is available here. To read more about the regressive nature of food taxation see here.