Finland’s Ministry of Finance (MoF) is considering the content and the conclusions of a joint expert report that predicts a 3.4% to 5% fall in the retail price of food products if the Finland government lowers the current value added tax (VAT) rate on food products from 17% to 12%.
The MoF commissioned report was produced by the VATT Institute for Economic Research and the PTT Pellervo Economic Research Institute. The report noted that Finland currently has the second highest VAT rate on food, after Denmark, among the OECD countries.
“The high food prices in Finland are largely due to the country’s high VAT rate. The reduction of the VAT level to 12% would be the equivalent of a 0.44% uniform cut in income taxes in all income brackets. Both reforms would cost approximately EUR450m (US$577.65m) in loss of tax revenues to the state,” said the report.
“A 5% reduction in VAT rates on food would benefit lower income households relatively more than an income tax cut. This would not, for example, apply to the unemployed or retired,” said Pasi Holm, managing director of the PTT Pellervo Economic Research Institute.
The report concludes that a 5% cut in food VAT rates could lead to a 0.62% to 1% increase in private consumption.