Christmas Shopping Spree: Will Your Purchases Be Tax-Free

In Germany, consumption is slow as inflation has eroded purchasing power. The losses from the crisis have not yet been made up. Symbolic of this: the decorator Depot have had to file for bankruptcy, close branches and lay off workers as costs have risen, but Germans are still spending 14 percent less on furniture than in 2019. A package would be needed economic stimulus for a long time. “Bazooka” or “oomph,” whatever the chancellor called it. But of course nothing will come of it now that the traffic lights have gone out.

But Canada is worth a look. Prime Minister Justin Trudeau is under just as much political pressure there as the Chancellor is here. In studies, the Conservatives lead that the Canadian economy collapsed as a result of Corona and the war in Ukraine, but unlike Germany, it has already recovered, above pre-crisis levels and growing at 1.1 percent this year. That’s not much, but at least it’s better than stagnation in Germany. In Canada, too, inflation has eaten away at real wages and caused a lot of frustration among voters. Trudeau is now fighting this with unusual measures.

Shortly before Christmas is postponed you have VAT for two months on a whole range of products: food, drinks, children’s goods, children’s clothes, books, game consoles, restaurant visits and Christmas trees. In return, the federal government is forgoing 1.1 billion euros in tax revenue. A family spending 1,400 euros on purchases during this period would save 70 euros in federal VAT.

But that’s not all. In addition to the federal VAT, the provinces also set their own VAT rates between zero and ten percent. The total VAT is therefore between five and 15 percent. In the highest case, the family would save the equivalent of 210 euros – and the areas would avoid income accordingly.

In general, it’s a good idea to reduce taxes that make shopping more expensive. Small and medium earners benefit disproportionately from this because they spend a much larger proportion of their income on purchases than the highest earners. A number that proves this for Germany: The top ten percent earn a third of all income, pay nearly 60 percent of total income tax, but only 20 percent of the total indirect taxes (including VAT). On the other hand, the lowest ten percent earns only 2.6 percent of the total income but pays 5.4 percent of the indirect taxes. Even more clearly: the bottom half earns only 24 percent of all income, but pays 36 percent of indirect taxes. Indirect taxes are therefore anti-poor taxes.

However, reducing VAT for only a short period of two months creates practical problems. Knowing that cheaper purchases will start on December 14, customers are canceling their purchases. In the next two weeks, sales are likely to decrease first before the shops then – to put it bluntly – close. On the other hand, shopping will be carried forward and pantries will be filled before the end of the tax exemption on February 15. Instead of using the normal, expected capacity of the shops, the tax exemption creates artificial ups and downs. This is a problem for stores because they have to change and adjust their purchases and storage – and causes unavoidable costs. In addition, poorer families cannot afford to buy on a large scale, let alone cancel. Because the fridge and bank account are at least full and there is little opportunity for “strategic shopping”.

A reduction over a longer period would be better than a short term cancellation. The savings are then stretched a bit, but the practical problems are reduced. If they were permanently reduced, they would even be completely avoided. In addition, the relief would be distributed more equitably and the financial situation of the provinces would be saved if only the federal VAT was abolished – but then over a longer period of time.

Yes, VAT cuts would be ideal for an economic stimulus package and would encourage branded consumption. But he could not copy it from Canada in this country. Because there are fixed requirements for VAT rates in the EU. Simply removing the tax rate on Christmas trees and children’s products would break EU law.

What would be possible, however, is the abolition of VAT on basic foodstuffs, as there has been an exception for this in EU law since 2022. Spain also used this at the beginning of 2023 to ban put on inflation. It was only in October that Spain abolished VAT again.

On the other hand, under EU law, the VAT on electricity could be reduced from 19 to 7 percent. Since every home uses electricity, this would also be an effective relief. The German economy desperately needs it. But that is not to be expected. Especially not at Christmas time. Too bad!