The Limits of a Broad VAT Cut: Pass-Through Heterogeneity and Welfare Interpretation

<jats:p>This paper studies heterogeneity in the pass-through of Germany's temporary VAT reduction in July 2020. Using confidential product-level CPI data, we document substantial dispersion in consumer-price responses: nearly half of standard-rate products show no consumer-price change, while 30 percent exhibit full pass-through. Lower-income households experienced somewhat larger proportional price declines than higher-income households. Using an inverse-optimality consistency test, we show that, once the full revenue loss is considered, the reform cannot be rationalized by any progressive weighting of gains across income groups.</jats:p>