It’s time for pasta: reasons for and against the reduction of VAT on food proposed by the PP

There is a bit of a mess to begin with. Feijóo spoke of products that already have a super-reduced VAT (4%) such as flour, milk or eggs. So the first thing would be to clarify this first point. They pay 4% VAT on basic products such as: bread, flour, milk, cereals, eggs, fruits, vegetables, and legumes. The PP proposes to add to this list: pasta, oils, meat, fish and preserves. Cost of the measure, according to the popular: 900 million euros. The Government has rejected the proposal and has reminded the PP that they were precisely the ones who increased VAT rates from 8% to 10% and from 18% to 21% in 2012. Asked this Monday about the issue, the commissioner European Minister of Economy, Paolo Gentiloni, responded: the discussions on taxation within the Member States are “perfectly legitimate”, but we must be “cautious” regarding the impact of only reducing VAT without other measures to support families and companies. The data The price of food rises on average almost 14%. It is the last data we have on the CPI for August, but we know that there are products that have become much more expensive. Of the foods that do not have super-reduced VAT and that the PP proposes as candidates are: Pasta, +30% increase in price in the last year. Fresh fish, +9.7%. Olive oil, +13.2%. Other oils, +71.2%. Chicken, +17.6% Beef, +15.2%. One of the arguments to defend this new tax cut, and which the PP has been repeating for months, is that the government is bringing in more money. The collection data up to the month of July shows a growth in VAT revenue of 20.8%, compared to that accumulated between January and July 2021. This percentage translates into 8,000 million more revenues from this tax. The Government explains that the figure reflects an “improvement in consumption and price increases.” VAT is paid based on the price of the product, so if the product price increases, so does the VAT that is paid. The Government has already waived 930 million VAT revenues between January and July due to the reduction in the rate on electricity. What the experts say Numerous international organizations have been repeating for months the idea that government aid to compensate for the rising cost of living should focus on households that really need it. The last to do so was the president of the European Central Bank, Christine Lagarde this Monday: she spoke of “temporary and directed” aid. A VAT reduction does not take into account the income of families and benefits all taxpayers regardless of their purchasing power. Studies show that it is more efficient to maintain (or increase) indirect taxes such as VAT and compensate those most in need through spending. It is the line that many experts defend and that, however, has very little fit in political discourses, both on the right and on the left. “Perhaps it is the most optimal technically speaking,” recognized a deputy a few months ago in a debate on taxation in Congress. “But then I can’t go to my electorate and sell them a VAT increase that will then be compensated for low incomes.” For years, the IMF and the European Commission have recommended that Spain increase VAT collection. The criticism is not so much on the level of the rates (the maximum 21% is more or less in line with the rest of the EU), but on the amount of goods and services that are excluded from paying that maximum rate. The data also show that the tax differential in our country is focused precisely on indirect taxes: Spain earns 2.5 percentage points of GDP less than the EU average through VAT, mainly. “VAT is what makes Europe have a welfare state and we can finance it. It is the tax with the greatest collection power and what is being proposed by both right-wing and left-wing parties seems outrageous to me,” says an expert in the matter. Can the economy afford it? The measures to reduce the cost of electricity have involved a collection cost of 4,268 million euros until last July. The Government, despite entering more this year (income tax collection also increases: 17% until July), will end the year with a deficit of 5% of GDP, according to forecasts by the Ministry of Economy. If the old European fiscal rules were in force, they would have given us a yellow card. The option of giving up more income may not be as easy as it seems when you zoom in. The other question that economists would ask would be: Do we choose to lower VAT on certain products and give up 1,000 million in collections? Do we keep rates and allocate that money (or part) to try to help families who are having the worst time due to the rise in the CPI? What is more effective to achieve the objective?