Do reduced VAT rates on foodstuffs in EU affect consumers?

Abstract

Value added tax represents an important fiscal policy instrument, mainly because of the stable source of tax revenues of state budgets. At the level of EU member states, the value-added tax is most harmonized, individual member states have always an option to implement more types of VAT rates on selected goods. In order to keep prices of foodstuffs and basic necessity products at the lowest possible level and with the highest availability for consumers, EU member states apply reduced VAT rates on these goods. The main objective of the paper is to research the impact on reduced VAT rates on foodstuffs in relation to consumers. The complexity of legislative adjustments on taxation of foodstuffs should be progressively simplified because reduced VAT rates on foodstuffs become ineffective and increase the burden on households compared to incomes of households. This paper is dedicated to the observation whether the application of the reduced VAT rate on foodstuffs affects the change in total expenditures of households. Based on the panel regression model with fixed effects on states, the standard VAT rate at the chosen significance level plays a significant factor, which affects total expenditures on foodstuffs of households and thus affects consumers. In the case of the reduced VAT rate on foodstuffs, this fact has not been confirmed.