Last month the European Union (EU) gave the final green light to update the EU Value-added Tax (VAT) Directive and broaden the list of goods and services to which two reduced VAT rates can be applied while allowing for a reduced VAT rate below 5 percent for the first time.
Prior to the COVID-19 pandemic, the EU was looking to harmonize VAT rates and gradually eliminate the reduced and super-reduced rates. Now, the EU has changed course in favor of the additional reduced VAT rates. The EU Parliament considers that to address future exceptional circumstances like pandemics, humanitarian crises, or natural disasters, reduced rates on essential goods would “benefit low-income households and, as such, tackle the regressiveness of the VAT system.” However, recent research shows that reduced rates and exemptions are not an effective way of supporting low-income households and could even increase the regressiveness of the system if, to achieve revenue goals, the general VAT rates are increased.
Source Tax Foundation
