Price effects and pass-through of a VAT increase on restaurants in Germany: causal evidence for the first months and a mega sports event

TL;DR

This study examines the immediate and short-term price pass-through effects of a VAT increase on German restaurants using causal inference methods, finding partial pass-through and no demand-driven price change during a major sports event.

Contribution

It provides causal evidence on VAT pass-through in the restaurant sector and assesses the impact of a large sports event on pricing behavior.

Findings

31% of VAT increase passed on in January

Pass-through increased to 58% over six months

UEFA Euro 2024 did not affect price adjustment patterns

Abstract

This paper analyses the price effects and tax pass-through of a VAT increase from 7% to 19% on restaurant services in Germany as of January 1, 2024. The Synthetic Control Method (SCM) is used to identify the causal effects of this reform using prices of goods and services unaffected by the tax change as a counterfactual for restaurant prices. Immediately in January, 31% of the tax increase was passed on to consumer prices. Pass-through increased to 58% in the following six months, which corresponds to a causal consumer price increase of about 6.5%. The presumed increase in demand for gastronomy services due to hosting the UEFA Euro 2024 tournament did not alter the path of price adjustments compared to previous months.