Ifo President Fuest Calls for Abolition of Reduced VAT Rate

Fuest justifies his position with the argument that the reduced value-added tax rate of currently seven percent, which applies to food, books, and train tickets, among other things, is not precisely targeted from an economic perspective. In his assessment, abolishing it could create room for a fundamental reform.

Arguments For and Against the Reduced Rate

The debate over value-added tax is part of a broader discussion about the tax structure in Germany. Supporters of abolition point out that the subsidization of certain goods through a reduced tax rate particularly benefits higher-income households, which spend a larger share of their budget on the favored products. Critics, however, warn of an additional burden on low-income households.

In the economic policy discussion, reference is also made to the revenue side of the state. According to calculations by tax experts, the reduced tax rate leads to revenue shortfalls in the billions, which would have to be offset elsewhere. What specific measures Fuest proposes to close this gap remained unclear in the available sources.

The move from Munich comes at a time when the federal government is working on the outlines of a comprehensive income tax reform. It is set to take effect in early 2027. It remains unclear which of the existing tax benefits and special provisions will be put to the test.

Impact on the Reform Plans

Observers of the economic policy debate see the Ifo president's statement as a signal to political decision-makers. The Ifo Institute enjoys a high reputation in German economic policy, and its positions are regularly noted attentively in Berlin.

It remains unclear how the federal government will react to the move. The available information also reported nothing about possible transitional arrangements or a gradual reduction of the reduced rate.

The discussion about the future of the reduced value-added tax rate is therefore likely to pick up speed in the coming months, particularly when the federal government presents the first more concrete key points of its reform plans.

Fuest also commented in a broader context on the tasks of the Federal Court of Audit and Bavaria's fiscal situation, as the available sources show. However, these statements are in a different context than the VAT debate.