Evaluation of the reduced VAT rate

In the Netherlands, there is a differentiated VAT rate. The principle is that all goods and services fall under the standard rate of 21%. The reduced rate of 9% is the exception to this rule. This evaluation focuses on the effectiveness and efficiency of the reduced VAT rate. To investigate this, the following research methods were used: desk study, interviews, involvement of subject matter experts, data analysis, analysis of implementation information, and analysis of legal procedures.

Effectiveness
The effectiveness of the reduced VAT rate varies between (1) integral goals and (2) product groups. When considering integral goals, the following conclusions are drawn:

• The reduced VAT rate leads to less tax pressure on lower-income individuals and is therefore effective. The extent to which consumers benefit from the VAT reduction (and not the sellers) varies by product group and depends mainly on the elasticity of supply and demand.
• The reduced VAT rate, in certain cases, results in increased consumption of certain goods and is partially effective. The extent of increased consumption varies between product groups.
• The reduced VAT rate, in certain cases, supports specific sectors and is therefore partially effective. The level of sectoral support varies between product groups.
• The reduced VAT rate, in certain instances, leads to increased employment and is partially effective. It is observed to be effective for employment in the horticulture sector and possibly for certain labour-intensive services and the museum sector.

Efficiency
In general, the reduced VAT rate is not an efficient tool to achieve the intended goals. Based on integral goals, the following conclusions are reached:

• The reduced VAT rate is not an efficient tool to reduce tax pressure on lower-income individuals. Through quantitative analysis, it is concluded that the reduced VAT rate is highly inefficient in reducing tax pressure on lower-income individuals. The more affluent a household, the more they benefit from the reduced VAT. The 50% most affluent households benefit twice as much from the reduced VAT as the 50% least affluent households. Only 10% of the support reaches the 20% least affluent households. To allocate €1 to the 10% least affluent households, almost €20 needs to be spent in total. Product groups that are not involved in reducing tax pressure diminish efficiency in this context.
• The reduced VAT rate is likely not an efficient tool to increase the consumption of certain goods. Quantifying this is not possible.
• It is not possible to determine if supporting sectors through the reduced VAT rate is efficient. Quantifying efficiency in this regard is impossible. Supporting certain sectors does not align well with policy efficiency from a broader perspective.
• Creating more employment through the reduced VAT rate is likely not efficient. The costs of creating a job may be higher than the income associated with it.

Policy Options and Recommendations
There are usually better alternative instruments than reduced VAT rates to achieve the policy goals mentioned here.

• Better alternatives to reduce tax pressure on lower-income individuals include targeted benefits and/or reductions in income tax.
• Targeted subsidies to producers and/or consumers seem to be a more efficient way to stimulate the consumption of certain goods than the reduced VAT rate. However, subsidies also have limitations and challenges. Information campaigns are also a means to achieve the goal.
• For supporting sectors, targeted subsidies to producers appear to be a more efficient option than the reduced VAT rate.
• To create more employment, reducing labour taxes is a more efficient instrument than the reduced VAT rate.

Want to learn more about the research? Ask Reg Brennenraedts or Jasper Veldman.