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Meals on Wheels: Restaurant and Home Meal Production and the Exemption of Food from Sales and Value Added Taxes

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  • Aled Ab Iorwerth
  • John Whalley

Abstract

This paper discusses efficiency considerations underlying the widespread exemption of food from sales and value added taxes, in contrast to the distributional considerations usually used to justify them, analyzing the implications for tax policy. Although there are increasing returns in both household and market production of meals there are, nonetheless, critical differences between them. Market production is imperfectly competitive leading to average cost pricing with free entry, but because production in the household involves only one firm, any household can appropriate the consumer surplus from its own production and hence marginal cost price. We use a numerical simulation model using 1994 Canadian data with increasing returns to scale in both home and restaurant meals resulting from fixed costs and where a Dixit-Stiglitz Chamberlinian structure is used to represent restaurant meal provision. Because food (along with time and durables) is an input into home provided meals, more than full taxation of food would seem to be justified to offset the non taxation of time inputs into household production, even under constant returns to scale. Because of the differences in pricing rules between market and household production with increasing returns, not only are gains from taxing food higher but they are amplified by also subsidizing food in restaurant use, and even more by subsidizing all marginal cost components of restaurant meal provision (including labour). On efficiency grounds, the exemption of food in sales and value added taxes

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6653.

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Date of creation: Jul 1998
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Handle: RePEc:nbr:nberwo:6653

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, November.
  3. Myles, Gareth D., 1989. "Ramsey tax rules for economies with imperfect competition," Journal of Public Economics, Elsevier, vol. 38(1), pages 95-115, February.
  4. John Piggott & John Whalley, 2001. "VAT Base Broadening, Self Supply, and the Informal Sector," American Economic Review, American Economic Association, vol. 91(4), pages 1084-1094, September.
  5. Cremer, Helmuth & Thisse, Jacques-Francois, 1994. "Commodity Taxation in a Differentiated Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 613-33, August.
  6. Dierickx, I. & Matutes, C. & Neven, D., 1988. "Indirect taxation and cournot equilibrium," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 385-399.
  7. Konishi, Hideki & Okuno-Fujiwara, Masahiro & Suzumura, Kotaro, 1990. "Oligopolistic competition and economic welfare : A general equilibrium analysis of entry regulation and tax-subsidy schemes," Journal of Public Economics, Elsevier, vol. 42(1), pages 67-88, June.
  8. Wilson, John Douglas, 1989. "On the Optimal Tax Base for Commodity Taxation," American Economic Review, American Economic Association, vol. 79(5), pages 1196-1206, December.
  9. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
  10. Konishi, Hideki, 1990. "Final and intermediate goods taxation in an oligopolistic economy with free entry," Journal of Public Economics, Elsevier, vol. 42(3), pages 371-386, August.
  11. Stern, Nicholas, 1987. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition," Journal of Public Economics, Elsevier, vol. 32(2), pages 133-158, March.
  12. Michael L. Katz & Harvey S. Rosen, 1985. "Tax Analysis in an Oligopoly Model," NBER Working Papers 1088, National Bureau of Economic Research, Inc.
  13. Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Papers 821, Queen's University, Department of Economics.
  14. Boskin, Michael J., 1975. "Efficiency aspects of the differential tax treatment of market and household economic activity," Journal of Public Economics, Elsevier, vol. 4(1), pages 1-25, February.
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Cited by:
  1. Claudio Agostini, 2004. "The Effect of Sales Tax Rates on Food Exemptions," ILADES-Georgetown University Working Papers inv155, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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