Research / BFI Working PaperOct 27, 2021

A Temporary VAT Cut as Unconventional Fiscal Policy

Rüdiger Bachmann, Benjamin Born, Olga Goldfayn-Frank, Georgi Kocharkov, Ralph Luetticke, Michael Weber

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.

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