Most likely, the VAT will be raised from 16 to 19% on January 1st, 2007. Exempt are certain goods for daily usage. With this announcement the newly formed government has triggered a debate as to whether or not the increase will lead to higher consumer prices.

My opinion is such that an increase in VAT does not inevitably have to lead to higher prices. Aside from the fact that, due to the tough competition at the manufacturer’s level, as well as the retail level, a three percent price increase can hardly be enforced. There are possibilities in manufacturer as well as retail margins to absorb this increase. The information that revenue of industry and retail leaves little financial scope is not really suitable as an argument. In fact, these margins should be looked at in as far they offer room for absorption of this tax increase.

Just by looking at the unreasonable sales offers of retail, you can tell that a repression of the ‘rebate rage’ offers the first step towards problem solution. Surely, less rebates mean for the consumer that some special prices and bargains will no longer be offered. However, since special prices and bargains did not revive the market there is no danger that less of such offers are going to cause an abrupt downturn.

Even on the side of the industry there are ways to help out that the increase in VAT is not going to lead to price increases. The source for this lies within huge sales promotion budgets which the industry uses on a day to day basis to buy the favor of retail, without any true trade-off. Marketing budgets are riddled with items which amount to nothing. Perfumery chains, for instance, receive millions just so that manufacturers are allowed to hang their posters in the display windows. In order to be allowed to stock the shelves with their goods, manufacturers pay generous placement monies. And I’d only like to note in the margins that sales people are more and more often being paid by the industry which also conducts floor management.

Politicians have a case of Hobson’s choice: Only a tax increase can straighten out public finances, the budget and only the VAT would raise appreciable amounts of money. Straightening out the budget is prerequisite that the people in Germany become courageous and burning for action again. To show courage and to get involved are prerequisites for a functioning community. Germany has lived for 30 years beyond its means. Businesses, trade unions and politicians have generously dispersed and drawn a bill on the future. Not enough money can be raised by savings in public funding in order to honor the bill. Thus a tax increase is required.

It remains to be seen if industry and retail, other than at the adoption of the Euro, are going to utilize the time between now and January 1st, 2007 to find ways to work the VAT increase into the calculation without raising consumer prices, so that the consumer does not have to pay for it again. Every business has many ways to solve this problem of a VAT increase without cut back’s in performance. The consumer is going to thank industry and retail for it.