A temporary VAT cut as unconventional fiscal policy

Author / Creator

Bachmann, Ruediger, author

Available as

Online

Summary

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 polic...

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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