CAN PUBLIC INTERVENTION REALLY SUPPORT THE HOSPITALITY INDUSTRY?THE CASE OF RECENT VAT REDUCTIONS IN GERMANY

Tourism caught the attention of policy makers as tourism was growing for a long period of time and is anticipated to grow even more in the future. Additionally tourism has a higher growth rate than the world economy, which makes it even more interesting for policy makers. Tourism offers economic benefits for travel destinations and generates income even for businesses that are not directly linked to tourism so that tourism can enhance employment. Through this, the government is able to benefit from tourism via taxes and even through taxes that are levied on goods and services not directly linked to tourism. The levied taxes, paid by tourists, are necessary to provide public services demanded by tourists. It is crucial for the government to design a taxation system that is able to cover the costs to provide these services and that charges the “accurate” amount of tax from the people receiving the services without setting up barriers or destroying the industry. The purpose of this study is to assess the capability of a cut in value‐added tax (hereafter VAT) as a measure of public intervention to support the hospitality industry by analyzing the impact of the recent interventions in Germany, where the Government has decided to undertake it to counter the Financial and Economic crisises. To our knowledge, a “structured” real study is not available at the moment, but forecasts and projections, as in the case of the implications of the INFORGE – Model . Mönnig and Wolter (2010) have tried to apply this econometric model in order to gauge the impact of the recent VAT reduction, induced by the Growth Acceleration Act, on hotel overnight stays. This work pioneers the field using a significance analysis. A time series (1999 ‐ 2010) of I‐O tables and key economic factors, provided by the Federal Statistical Office, is considered to measure the impact of a reduced VAT and hotel accommodations. The numbers received from the I‐O tables are interpreted in conjunction with influencing key factors such as GDP, exchange rates, crisis, and mega‐events in order to determine the impact of public intervention.The data analysis shows that the hotels, boarding houses and inns performed significant increases in years of mega‐‐‐events, such as the Expo 2000 Hannover or the FIFA World Football Cup in 2006. The years following the FIFA World Football Cup still showed a consistent growth, which could be due to the assumption that the FIFA World Football Cup yields further positive economic stimuli after the event. But negative events also took place in the considered time frame, such as the terrorist attacks in New York and the financial and economic crisis, which brought about a sudden end to the improvement in the tourism sector. The paper is structured as follows; section two introduces the background of the financial and economic crisis, the relevance and usage of value‐added tax, as well as the measures taken to reduce its economic impact of the crisis. Section three reviews the VAT situation in Europe and the relevant literature on the impact of VAT changes on the hospitality industry. Section four describes the data available for the analysis. Section five analyzes and discusses the data and section six concludes the findings of this study.