According to the current legal status, the application of the reduced VAT rate to restaurant services will expire at the end of the year and it should stay that way.
If you believe the petition from the industry association DEHOGA (DEHOGA, 2023), then the catering industry is in for a shock with the return to normal VAT, which will massively affect restaurateurs, consumers and staff. Not only would many restaurants have to give up because they can no longer finance electricity bills and food. The provision of particularly healthy and sustainable food would also be at risk. In addition, poorer households could no longer afford to go to the restaurant because prices would shoot up with the return to normal taxation. The “cultural asset” of restaurants and pubs, including their gastronomic diversity, would be at risk. On top of that, it would no longer be possible to pay staff appropriately because – according to the logic of DEHOGA’s argument – it is the low VAT that opens up the scope for fair wages.
The semi-economically educated reader asks himself in astonishment what kind of financing miracle cure the reduction in VAT is supposed to be. Because the 12 percent tax rate advantage (currently 7% compared to the standard rate of 19%) would have to finance everything from fair wages to better and more sustainable quality, higher purchase prices for energy and food and, on top of that, discounts for customers. And already at this point it becomes clear that the long list of DEHOGA arguments, when viewed together, lacks internal logic. Either the VAT advantage is primarily used to pay staff better. But then there is hardly anything left for the restaurants’ margins, better quality or cheaper prices for customers. Or the restaurants largely pass on the VAT advantage to the customers, but then there is no significant additional scope for better pay for workers and the other alleged advantages of the tax advantage. Of course, it could be that everyone involved – restaurateurs, customers, workers and suppliers – share the advantage and that quality is also increased and more attention is paid to sustainability. However, the VAT advantage that would then be attributable to each of these uses would be so minimal that there would hardly be any noticeable consequences for each of the individual aspects mentioned.
But it’s not just the overall view of the arguments that shows that the industry’s 7 percent campaign is on thin ice. A closer look at each individual aspect also raises considerable questions.
Consequences of crisis and structural change: This exception was decided in 2020 as temporary tax policy help for the catering industry during the pandemic. With the end of the pandemic, the original crisis-related justification for the seven percent tax on food in restaurants has disappeared. Even in the context of the crisis, the measure was not without controversy. The industry’s recovery is taking a varied course; real sales, especially in major cities, are already above pre-crisis levels (Krause et al., 2023), but there are also losers. But ultimately this is nothing other than normal structural change. It is not sensible policy to provide ongoing subsidies to an industry because it is faced with a changing market environment.
Inflation consequences: The expectation that if the temporary tax subsidy ends as planned, there would be a jump in restaurant prices to the full extent of the tax rate difference is not plausible. With this perspective, DEHOGA even contradicts itself. Ultimately, the list of possible consequences discussed above means that prices are by no means the only adjustment instrument. It should also not be overlooked that the industry has already achieved significant price increases despite the reduction in VAT. Regardless, attempting to combat inflation through debt-financed price subsidies is not promising. Sticking with costly crisis aid despite the end of the pandemic is counterproductive from a macroeconomic perspective and makes it more difficult for the European Central Bank to return to price stability in the long term.
Labor shortages and fair wages: The lack of workers cannot justify special tax treatment for an industry. The German economy is faced with a growing labor shortage across the board, in all sectors and at most skill levels. Subsidizing selected industries would only shift the problems between sectors and is therefore not a sensible solution. In addition, the tax losses on VAT would increase the pressure to increase other taxes such as income tax and would further exacerbate the labor shortage due to the further decline in performance incentives.
Affordable prices for poorer households: The average household expenditure on restaurants and meals increases with household income. Households without children demand relatively more of these services than households with children. The tax reduction for restaurants is therefore regressive: it benefits relatively rich and childless households. The tax reduction for the catering industry is therefore not a suitable distribution instrument. If you want to help poorer households and families, the means of choice are targeted transfers such as child benefit, but not regressive subsidies, which only reach the actual target group to a very small extent.
Cultural assets restaurants and rural areas: The view that the tax subsidy could be suitable for preserving restaurants in inner cities or villages that are no longer in demand is not convincing. Tax subsidies must be justified with substantial arguments and it is pointless to use such instruments to keep companies without a viable business model afloat for a short time.
Sustainability: The tax reduction for restaurants does not come with any requirements regarding the ecology or health of the food. The Argentine steakhouse is no less favored than a vegan restaurant that only uses local food. In this respect, the value-added tax subsidy must be viewed from the outset as unsuitable for achieving sustainability goals in an effective and efficient manner.
The industry also points to unequal treatment, which in its view justifies the extension of the 7 percent tax for the catering industry: In the EU, the majority of member states tax restaurants at a reduced rate, which would lead to competition problems. And domestically there would be an unacceptable unequal treatment with food purchased directly and the delivery services that only pay the reduced tax. Ultimately, these two aspects do not change the overall assessment.
International competition: It is true that other EU countries often apply a low rate for restaurants. One reason for this may be concerns about tax evasion in some countries with a strong shadow economy. However, lower VAT in other countries does not result in any significant competitive disadvantage for German restaurants. Gastronomic services are local and, apart from border areas, a diversion of tourism or business travel through different VAT on restaurant services is not to be expected due to their low importance in overall travel costs.
Unequal treatment with food and delivery services: In contrast to catering services, the reduced taxation for food is convincingly justified in terms of distribution policy. Conversely, compared to restaurant visits, the proportion of food in the shopping basket of poorer households is comparatively high. The discount for delivery services is due to the fact that they do not provide an extensive service in the restaurant. In fact, this distinction is vague. However, questionable applications of the reduced tax rate should not be addressed by expanding them.
As a result, the arguments put forward for a permanent extension of VAT for the catering industry are not convincing. The post-pandemic period means that the catering industry, like other sectors, will undergo further structural change, but this does not provide any justification for permanent subsidies. This subsidy is currently associated with annual tax losses of a good three billion euros. If there were a permanent contract, these costs would continuously increase with the industry’s nominal sales growth. For the coming decade, total costs of around 38 billion euros would be expected, which would have to be offset by higher taxes elsewhere or spending cuts. The distributional effect of this tax subsidy should not be overlooked, which tends to benefit wealthy and childless households, but ultimately has to be financed by the community of all tax payers.
According to the current legal status, the application of the reduced VAT rate to restaurant services will expire at the end of the year and it should stay that way. The federal government should now immediately commit to ending the reduced tax rate for restaurant services at the end of the year in order to finally eliminate any planning uncertainties for the coming year.
However, the arguments for a reduced tax rate are valid for the narrow sub-area of catering for schools and kindergartens. Here, not only distribution policy arguments – the more targeted benefiting of poorer households – but also the contribution to the compatibility of work and parenthood speak for special consideration. In addition, further erosion of sales tax should be avoided and existing exceptions should be reduced.
This article is based on the detailed study:
Heinemann, Friedrich, Katharina Nicolay and Daniela Steinbrenner (2023), The reduced VAT in the catering industry, assessment and subsidy policy conclusions, ZEW short expertise No. 23-04, Mannheim.
Link:
DEHOGA (2023): 7% VAT on food must remain so that we preserve what makes our country livable and lovable, petition,
Krause, Simon, Carla Krolage, Christoph Ungemach, Jennifer Meder, Jonas Riefle, Stefanie Schill and Lena Fischer (2023): Gastronomy on the rise despite many crises: What does the new consumer behavior look like after Corona?, ifo Schnelldienst 9/2023, p. 51-56.
ZEW Mannheim and Heidelberg University