This undergraduate thesis explores the role and impact of reduced value-added tax (VAT) rates within the tax system of the Republic of Croatia. The value-added tax is one of the key sources of revenue for the state budget, and its reduced rates are used as a tool to stimulate consumption and facilitate access to essential goods and services. The thesis presents an overview of the theoretical foundations of VAT, examines its historical development, and analyzes the economic effects of implementing various VAT rates. Special attention is given to the analysis of the application of reduced VAT rates of 5% and 13% in Croatia, along with a comparative analysis with other EU countries. The theoretical section covers key concepts and fundamentals of taxation, including the distinction between direct and indirect taxes, as well as considerations of fairness and efficiency. The historical development and economic impacts of VAT are also examined, including its effects on consumption, employment, and overall economic activity. The empirical part of the thesis analyzes the application of reduced VAT rates in Croatia, with a specific focus on the 5% and 13% rates applicable to certain basic goods and services. A comparison with reduced VAT rates in other European Union countries allows for a broader understanding of the implications and various approaches to the application of this tax instrument. Through a detailed analysis of the effects of reduced VAT rates on the economy, the thesis identifies both positive and negative aspects of their application. Positive effects include the stimulation of consumption and easier access to basic goods, while negative effects include a reduction in budget revenues and potential market distortions. In conclusion, the thesis provides a comprehensive overview of the role of reduced VAT rates in the tax system of Croatia and the European Union, and assesses their economic impacts. The research results can serve as a basis for further reflection and optimization of tax policy, with the aim of achieving a balance between fiscal stability and social equity.