Temporary VAT rate cuts and food prices in e-commerce

Since the onset of the COVID-19 pandemic in 2020, temporary VAT cuts have gained popularity as an unconventional fiscal policy tool. The effectiveness of these stimuli in reaching the intended recipients depends on a VAT cut pass-through to consumer prices; however, the empirical evidence, particularly in digital markets, is scarce. The aim of our paper is to measure the price shift in e-commerce following the VAT rate reduction and test whether this effect was consistent across different types of retailers, exploiting detailed daily price data from the six largest German online full-assortment grocery retailers. Our findings indicate that multichannel retailers passed on the VAT cut almost completely, whereas online-only retailers made fewer price changes. This discrepancy has significant implications for the effectiveness of temporary VAT cuts, as the reluctance of large online-only sellers to pass on VAT cuts to consumers could hinder the efficacy of this unconventional fiscal stimulus. Keywords: temporary tax reduction, value-added tax, digital markets, food markets, COVID-19.