🇩🇰🇩🇪🇪🇺 Why are there so many tax hoppers?

Letter from Europe #10

The Story

What states get.

What do they get?

Money. In 2019 European countries’ tax revenue, including social contribution, stood at 41.4 of the European Union's gross domestic product (GDP).

What is GDP again?

It is the total value of all the finished goods and services produced within a country or a bloc.

So roughly half of what is measurably generated in society goes to the state?

Yes. But this story is about a single tax. The most important one, the so-called Valued Added Tax, short: VAT.

Tell me more about that VAT. 

It is a tax on production and services, and it accounts for almost 14 per cent of GDP. By the way: The second relevant tax, the one on income and wealth, stood at 13 per cent. These two taxes are by far the ones with the highest government revenues. 

Get to the point.

VAT rates vary between European countries. Switzerland, as a non-EU-country, levies the lowest VAT rate of only 7.7 per cent, followed by Luxembourg (17), Turkey (18) and Germany (19). The countries with the highest VAT rates are Hungary (27), Sweden, Norway, and Denmark (25 per cent). These differences have a significant impact. People travel pretty long distances to shop where it’s cheapest. For instance, the VAT difference between Denmark and Germany is regularly 6 percentage points. But most groceries in Germany are taxed with a reduced rate of only 7 per cent, whereas in Denmark, there is not such a reduced rate. So the difference for groceries is 18 percentage points. In addition, Denmark levies high tax rates on alcohol. As a result, there are border shops along the German border to Denmark. In 2018 alone, Danes bought 600 million cans, most of all beer, worth more than half a billion euros in German shops. This is just between Denmark and Germany. This is just cans. 

Why so many cans? 

Cans are particularly cheap for Danes and Swedes. They don't have to pay a deposit. In return shoppers from Denmark and Sweden have to promise not to drink the drinks in Germany. This is as crazy as it sounds. German officials had argued that the cross-border consumers shouldn't be forced to pay a fee meant to encourage Germans to get a refund for returning used bottles and cans so they can be recycled. But this practice could soon come to an end. In June, the European Union's General Court told the European Commission, the EU's executive branch, to examine whether elements of this bustling border business violate EU laws meant to facilitate open trade and protect against unfair competition. Specifically, the General Court examined a complaint brought by the Danish Chamber of Commerce that alleges Germany of unfairly helping its border stores by letting them not charge deposit fees.  

Back to different tax rates. What's the problem with that?

Countries with low tax rates generate high tax revenues. Because people from countries with high taxes go shopping in countries with low taxes. Although taxes per product are low, total tax revenue is high. To avoid this, one has to implement border controls and import restrictions. Without such restrictions, a race to the bottom develops. One government wants to undercut the other one in terms of low taxes.  

That is not the idea of Europe. What is the EU doing against it?

According to EU law, member states are required to levy a standard VAT rate of at least 15 per cent and a reduced rate of at least 5 per cent. So there is a lower limit, at least. Interestingly, the tax rates do not approach this rate. On the contrary: For the past 50 years the rate has tended to rise, with stabilisation of around 21.5 per cent on average over the last decade. 

Sum it up. 

The Value Added Tax (VAT), a consumption tax assessed on the value added to goods and services, is the most important tax for European countries. The significant differences in tax rates lead to tax losses for countries with high tax rates. Although there is an incentive to lower the rates (race to the bottom) the opposite has happened.

PS: Last weekend, I was at the ferry terminal of Puttgarden which is located on the Geman island of Fehmarn. From there, ferries run regularly to Denmark. I had a look at the (according to the shop's information) biggest border shop in the world. 


Notes: 

https://www.courthousenews.com/eu-court-raises-doubts-over-bustling-german-border-drink-sales/

https://taxfoundation.org/vat-rates-europe-2019/

https://www.shz.de/regionales/schleswig-holstein/wirtschaft/keine-loesung-im-deutsch-daenischen-dosenbier-dilemma-in-sicht-id20675102.html 

https://www.stern.de/wirtschaft/dank-mehrwertsteuer--grenzhandel-boomt-mancherorts-in-deutschland-9336112.html

https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Tax_revenue_statistics 

https://ec.europa.eu/taxation_customs/what-vat_en

http://publications.europa.eu/resource/cellar/4244709e-7eba-4e40-b12a-3a5b9e68069a.0006.03/DOC_1

https://www.globalvatcompliance.com/vat-rates-in-europe-2021/

https://tradingeconomics.com/european-union/sales-tax-rate