Differentiated VAT: When Good Intentions Collide
The desire to help financially pressured households is a core political task. However, good intentions collide with other familiar good intentions, creating a series of paradoxes.
Opinion piece in Berlingske on 26 January, 2026 by Claus Thustrup Kreiner, professor and center director, CEBI, Department of Economics, University of Copenhagen; Jesper Gregers Linaa, deputy director, Danish Competition and Consumer Authority; and Hans Jørgen Whitta-Jacobsen, professor, Department of Economics, University of Copenhagen, external lecturer, Department of Economics, University of Copenhagen.
The debate on differentiated VAT rates has intensified as food prices have risen significantly. This is understandable. The desire to help financially pressured households – and perhaps at the same time promote healthier choices – is a core political task. However, good intentions collide with other well-known good intentions, thereby creating a number of paradoxes.
A paradox relates to the green transition. Quotas and taxes are well‑known and effective tools for encouraging companies to shift production in a greener direction. However, such a shift will involve higher prices on climate‑damaging goods. The primary purpose of CO₂ taxes is to incentivize greener production, but this inevitably leads to higher prices and thus lower demand for certain goods, which is part of the intended solution. It is therefore worth remembering that higher prices on climate‑intensive foods generate climate benefits by encouraging consumers to replace, for example, expensive beef with more climate‑friendly alternatives.
Another paradox concerns business conditions. In both Denmark and Europe, there is broad political consensus that administrative burdens on businesses should be kept low. The EU’s so‑called Omnibus Simplification Package, adopted in December 2025, specifically aims to ease companies’ reporting costs and administrative burdens. It is a response to the Draghi report’s message that European businesses are overloaded with such requirements. Differentiated VAT rates run directly counter to these efforts: More VAT rates mean more administration, higher reporting costs, and more opportunities for errors within companies.
A third paradox is found in the public sector. In line with the desire to reduce burdens for businesses, there is also a focus on reducing unnecessary administration within the state. A differentiated VAT system, however, points in the opposite direction by increasing administrative work related to development, monitoring, interpretation, and ongoing adjustments.
A fourth paradox relates to public health. The desire to spend billions of public kroner to push down food prices occurs at the same time as discussions about the prevalence of obesity and whether there should be public subsidies for weight‑loss medication. If public health is the goal, there are tools that are more precise and require less bureaucracy—namely excise duties imposed on unhealthy foods such as sugary drinks.
A fifth paradox concerns public finances and the seemingly cost‑free use of fiscal “room for manoeuvre.” As with any household, the principle applies that every krone spent in one place cannot be spent elsewhere. If fiscal space is used to make food cheaper, an alternative could simply be to put money directly into people’s hands by adjusting the tax and transfer system—allowing individuals to choose how to spend it. Compensation through the tax and transfer system also makes it possible to target support to those hardest hit, if the aim is to neutralize the distributional effects of higher food prices.
A sixth paradox concerns the time perspective. In response to a sudden rise in food prices, a permanent, structural change to the tax system is being rushed through. To the extent that rising food prices are temporary, this argues for temporary solutions. Targeted food vouchers for particularly vulnerable groups would be consistent with this logic, whereas a permanent change to the VAT system would not.
A final paradox concerns sound economic policy. In many cases, political decisions involve weighing advantages against disadvantages. Currently, a VAT change is being adopted that ultimately offers only disadvantages, as the goals could be achieved more appropriately with other instruments. Common sense therefore suggests maintaining the current simple system with a uniform VAT rate rather than introducing a complicated system with multiple rates.