The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail

We study the price effects of a temporary VAT reduction in Germany using a web-scraped data set of daily prices of more than 60 000 supermarket products. For causal identification , we compare the development of German prices to those in Austria. We find that the reduction of VAT rates led to a price decrease of 1.3%, implying that 70% of the tax cut were passed on to consumers. Moreover, the pass-through is higher for vertically integrated products (private label) than for independent brands. This is consistent with menu cost theories and theories predicting that price markups act as a buffer for cost shocks. JEL Classification: E31, H22, H25.