CBR Briefing #66

A line chart plotting the change in Germans’ readiness to make purchases, with a y-axis showing the percentage point difference compared with similar households outside Germany and a monthly x-axis going from around November 2005, when the tax increase was announced, to the months following January 2007, when the tax increase was exacted. The line starts at about zero, spikes to nearly thirty-five points at the end of 2006, and them plunges back to zero and stays below five for most of 2007.

How announcing a sales-tax hike could boost consumer spending

  • With interest rates already very low in the eurozone, some economists propose using unconventional fiscal policy to stimulate growth. Announcing future sales-tax increases is one such policy, according to a research team that includes Chicago Booth’s Michael Weber. They find empirical evidence in Germany, where a pre-announced Value Added Tax increase raised consumers’ appetite to spend.
  • The announcement of the tax hike increased expectations of inflation, encouraging people to spend. Germans’ willingness to buy durable goods increased faster than that of other European households, the difference peaking at 34 percentage points.
  • After the tax hike was enacted, willingness to spend remained comparable to the period before the tax was announced. This suggests that the approach would be effective in increasing overall consumption without driving up government spending.

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