Effects of Reduced VAT Rates during the COVID-19 Crisis

As part of the relief measures to cope with the COVID-19 pandemic the VAT rate in the catering and hotel industry has been temporarily reduced. This report examines this measure in comparison with recent changes in VAT rates on accommodation services in Austria. A legal assessment of the measures finds a violation of EU law, which, however, should not have any consequences due to the temporary nature of the aid measure. The empirical analysis of the recent VAT changes on accommodation services shows a stronger pass-through of the tax increase, compared to the subsequent tax reduction. Such asymmetries are also found in the recent literature. The theoretical explanations, including capacity constraints, only hold for the short run. For the current VAT rate reduction, there is hardly any evidence of pass-through, as tourism pricing is strongly influenced by pandemic-related measures.