Impact of Reduced Food VAT Rates on Members of Different Income Deciles Between 2010 and 2020

Abstract

Value added tax is the main source of revenue for public finances in the European Union. Their rates vary from one Member State to another, but as a general rule there is one standard rate and two reduced rates. The rate at which purchases of goods and services are taxed has a significant impact not only on the quantity purchased but also on the tax revenue. In Hungary, some food products were reclassified to a reduced rate after 2010. These were basic foodstuffs, dairy products, bakery products and meat products. However, vegetables and fruit were excluded from the reductions. The study looks at the impact of the tax cuts on relevant consumption in each income decile and the extent to which the tax cuts benefit poorer and richer people. It also presents and analyses the impact of the absence of tax cuts on fruit and vegetables. In terms of the specific goods basket under consideration, the main beneficiaries of the tax reduction were the wealthiest in HUF terms and the poorest as a percentage of their income. The change in consumption patterns of fruit and vegetables excluded from the tax reduction was similar to those of the food products covered by the tax reduction.