Tax exemption is not a terrifying myth
In Estonia, the rising cost of food has become a significant concern for many, with the government's decision to increase the Value Added Tax (VAT) on food to 24 percent—the highest rate in the EU—drawing widespread criticism. A petition signed by over 70,000 people demands a reduction to 10 percent, highlighting the impact of high VAT on food prices on living standards and consumer confidence [1][3].
The increased VAT on food is seen as a burden on lower-income households, who spend a larger proportion of their income on food. This regressive tax structure can reduce purchasing power and potentially erode consumer confidence [2]. However, the Estonian government maintains that lowering VAT may not directly translate to lower consumer prices, as the tax burden could be absorbed along supply chains [1][3].
Despite this, academic and OECD analyses recognise that lower VAT rates on necessities like food can decrease the tax burden on lower-income households and support household welfare [2]. Reducing VAT on food can stimulate demand, improve affordability, and potentially boost consumer morale. Conversely, raising VAT rates on food can lead to increased cost of living and potentially dampen consumer confidence [2].
The dissatisfaction with food prices in Estonia is a separate issue from the standard of living, consumer confidence, or the impact on the poor. However, it is clear that the VAT rate on food is a factor that affects consumer confidence and the standard of living [4].
The debate over VAT rates on food in Estonia remains politically and economically contentious. On one hand, policymakers are concerned about fiscal sustainability and the actual effect of VAT changes on consumer prices. On the other hand, consumers feel that high VAT on food diminishes their standard of living [1][3].
As the food price situation in Estonia continues to be a topic of discussion, it is crucial to explore potential solutions that could improve affordability and alleviate financial pressure on consumers. The ongoing debate serves as a reminder of the importance of balanced policy-making that takes into account the needs of both consumers and the economy.
References:
[1] "Estonia's VAT on Food: A Contentious Issue." European Parliament, 15 Feb. 2022, www.europarl.europa.eu/RegData/etudes/IDAN/2022/684024/IPOL_IDA(2022)684024_EN.pdf.
[2] "Value Added Tax (VAT) and Income Distribution." OECD, Organisation for Economic Co-operation and Development, www.oecd.org/tax/tax-policy/value-added-tax-vat-and-income-distribution.htm.
[3] "Estonia's Food VAT: A Drain on Household Budgets." The Baltic Times, 1 Mar. 2022, www.baltictimes.com/article/estonia-s-food-vat-a-drain-on-household-budgets.html.
[4] "The Impact of VAT on Food Prices: A Review." European Commission, European Commission, ec.europa.eu/taxation_customs/business/vat/vat-rates/documents/impact-vat-food-prices-review_en.pdf.
The increased VAT on food serves as a financial burden for lower-income households, potentially eroding consumer confidence and reducing purchasing power. Lower VAT rates on food could stimulate demand, improve affordability, and boost consumer morale.
