Demographic Change and VAT Revenues – Results from a Microsimulation Model for Germany

Similarly to many other European countries, Germany has experienced a considerable demographic shift since the 1970s: higher life expectancy and diminishing birth rates, only partly balanced by immigration, have led to an altered population structure with an increasing share of elderly people. In the next decades, population aging in Germany will accelerate and also induce a decline of the total population. These demographic changes can be expected to have a profound impact on the governmental budget. While changes in public expenditures have been forecasted regularly since 2005, the revenue side has received less attention to date. We study the long-term (2015-2060) changes in tax revenues induced by demographic change. This paper particularly concentrates on the development of the VAT revenues, forecasting its changes due to a diminishing and aging population. Estimating a private consumption model, we show this demographic shift is shown to affect the structure of private consumption. This is, in turn, linked to the VAT revenues via different taxation rates. While the absolute values of VAT revenues will not decrease in the long run, given the expected increases in real incomes, the model forecasts a significant decrease of VAT revenues in Germany driven by changing consumption structure compared to a baseline scenario without demographic change