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 general rate of 21%. The reduced rate of 9% is the exception to this. This evaluation focuses on the effectiveness and efficiency of the reduced VAT rate. To investigate this, the following research methods were used: desk research, interviews, involvement of subject matter experts, data analysis, implementation information analysis, and legal procedure analysis.

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

• The reduced VAT rate leads to less tax burden on those with lower incomes and is therefore effective. The extent to which buyers benefit from the VAT reduction (and not the sellers) varies per product group and depends mainly on the elasticity of supply and demand.
• In certain cases, the reduced VAT rate leads to increased consumption of certain goods and is partially effective in this respect. The extent of increased consumption varies between product groups.
• In certain cases, the reduced VAT rate supports specific sectors and is partially effective in this regard. The extent of sector support varies between product groups.
• In certain cases, the reduced VAT rate leads to increased employment and is partially effective in this respect. We observe that it is 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 instrument for achieving the intended objectives. When considering overall objectives, the following conclusions are drawn:

• The reduced VAT rate is not an efficient instrument for reducing the tax burden on those with lower incomes. Based on a quantitative analysis, it is concluded that the reduced VAT rate is a highly inefficient instrument for reducing the tax burden on those with lower incomes. The more affluent a household is, the more they benefit from the reduced VAT. The 50% most affluent households benefit twice as much from the reduced VAT rate as the 50% least affluent households. Only 10% of the support reaches the 20% least affluent households. Nearly €20 needs to be spent in total to give €1 to the 10% least affluent households. Product groups not involved in reducing the tax burden reduce the efficiency in this context.
• The reduced VAT rate is probably not an efficient instrument for increasing the consumption of certain goods. Quantifying this is not possible.
• We cannot estimate the efficiency of supporting sectors through the reduced VAT rate. Quantifying efficiency here is also not possible. Supporting specific sectors does not align well with policy efficiency from a broader perspective.
• Creating more employment through the reduced VAT rate is probably not efficient. The costs of creating a job may be higher than the income generated from it.

Policy options and recommendations
There are usually better alternative instruments than reduced VAT rates to achieve the policy objectives mentioned here.

• Improved alternatives to reduce the tax burden on those with lower incomes are 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 have their limitations and challenges. Information campaigns are also a way to achieve the objective.
• For supporting sectors, targeted subsidies to producers seem to be a more efficient option than the reduced VAT rate.
• Reducing labour taxes is a more efficient instrument than the reduced VAT rate to create more employment.

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