Raul Eamets: research does not support claims that food VAT cuts do not affect prices

Economist Raul Eamets writes that after neighbouring countries cut food VAT rates, Estonia is set to have the EU's highest food VAT rate at 24 per cent. Eamets emphasises that the high VAT rate harms low-income households most, as they spend a larger share of their budgets on food. Scientific research does not support the claim that cuts to food VAT do not affect final prices.

The food VAT issue has been on Estonia's agenda for some time, but now it has gained new momentum: Denmark has also decided to cut food VAT. This year, Latvia, Finland and Sweden have taken the same direction. The result is a situation where Estonia will become the EU country with the highest food VAT rate following these changes, at 24 per cent.

VAT hits the poorest hardest

Economist Raul Eamets explains that VAT is a convenient revenue source for the government because all consumers pay it, including those who do not actually have a choice. With food products, this is particularly evident: everyone has to eat, regardless of income.

High food VAT, however, disproportionately burdens low-income households. The most recent household expenditure data available date from 2020 and show clearly: the poorest 20 per cent of families spent 25 per cent of their budget on food, while wealthier families spent only 17 per cent. According to Eamets, this gap has likely widened since then.

Research speaks clearly

Eamets emphasises that scientific research does not support the argument often used against VAT cuts, namely the claim that retailers do not pass on the tax benefit to consumers and prices do not fall. Accepting such a position without evidence-based support would be misleading, according to Eamets.

The example of neighbouring countries puts both political pressure and a practical comparison point on Estonia: if Latvia, Finland, Sweden and Denmark all move towards lower food VAT, Estonia's higher rate becomes increasingly difficult to justify.