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Efficiency considerations and the exemption of food from sales and value added taxes

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  • Aled ab Iorwerth
  • John Whalley

Abstract

We evaluate efficiency considerations underlying the widespread exemption of food from sales and value added taxes and the implications for tax policy. Household and restaurant meals and both constant and increasing returns cases are examined. Higher taxes on food offset the non-taxation of time inputs into household production, even under constant returns to scale. With increasing returns, gains from taxing food are higher and amplified by subsidizing restaurant food and all marginal cost components of restaurant meals. On efficiency grounds, exemption of food from sales and value added taxes emerges as socially costly policy, especially under increasing returns.

Suggested Citation

  • Aled ab Iorwerth & John Whalley, 2002. "Efficiency considerations and the exemption of food from sales and value added taxes," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 166-182, February.
    • Handle: RePEc:cje:issued:v:35:y:2002:i:1:p:166-182
    DOI: 10.1111/1540-5982.00126
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    Cited by:

    1. X. Ruiz del Portal, 2017. "Optimal mixed taxation, public goods and the problem of high-skilled emigration," Journal of Economics, Springer, vol. 122(2), pages 97-119, October.
    2. Xiang, Di & Zhan, Lue & Bordignon, Massimo, 2020. "A reconsideration of the sugar sweetened beverage tax in a household production model," Food Policy, Elsevier, vol. 95(C).
    3. Louis Kaplow, 2020. "A Unified Perspective on Efficiency, Redistribution, and Public Policy," NBER Working Papers 26683, National Bureau of Economic Research, Inc.
    4. Louis Kaplow, 2011. "An Optimal Tax System," NBER Working Papers 17214, National Bureau of Economic Research, Inc.
    5. Richard Hawkins & Sally Wallace, 2006. "Source of income effects for demand decisions and taxable consumption," Applied Economics, Taylor & Francis Journals, vol. 38(20), pages 2371-2379.
    6. Dan Anderberg & Alessandro Balestrino, 2000. "Household Production and the Design of the Tax Structure," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(4), pages 563-584, August.
    7. Louis Kaplow, 2008. "Taxing Leisure Complements," NBER Working Papers 14397, National Bureau of Economic Research, Inc.
    8. Massimo Bordignon & Di Xiang & Lue Zhan, 2018. "Predicting the Effects of a Sugar Sweetened Beverage Tax in a Household Production Model," DISCE - Working Papers del Dipartimento di Economia e Finanza def075, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    9. Tatiana Malinina, 2010. "Recognition and Measurement of Tax Expenditures: International Experience and Russian Practice," Research Paper Series, Gaidar Institute for Economic Policy, issue 146P.
    10. Whalley, John & Zhang, Shunming, 2005. "VAT base broadening when the location of some consumption is mobile," Economics Letters, Elsevier, vol. 87(2), pages 199-205, May.
    11. Ezequiel Uriel & Javier Ferri & Maria Luisa Molto, 2005. "Estimation of an Extended SAM with household production for Spain 1995," Economic Systems Research, Taylor & Francis Journals, vol. 17(3), pages 255-278.
    12. Mr. Azim M Sadikov & Mr. Hans P Lankes & Mr. Dustin Smith & Ms. Katrin Elborgh-Woytek & Mr. Jean-Jacques Hallaert, 2006. "Fiscal Implications of Multilateral Tariff Cuts," IMF Working Papers 2006/203, International Monetary Fund.
    13. Jaime Acosta-Margain, 2011. "Tax-benefit incidence of value added tax on food and medicine to fund progressive social expenditure," Working Papers 194, ECINEQ, Society for the Study of Economic Inequality.
    14. Emerta Aragie & Hasan Dudu & Emanuele Ferrari & Alfredo Mainar & Scott McDonald & Karen Thierfelder, 2017. "STAGE_DEV. A variant of the STAGE model to analyse developing countries," JRC Research Reports JRC104686, Joint Research Centre.
    15. Ming Chang & Hsiao-Ping Peng, 2012. "Laffer effect, gross substitution, marginal cost of public funds and the level property of public good provision," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(5), pages 650-659, October.
    16. Alex Ufier, 2017. "The effect of VATs on government balance sheets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1141-1173, December.
    17. Ivanic, Maros & Valenzuela, Ernesto & Ludena, Carlos, 2005. "Reduction of global poverty through sector-specific investment," Conference papers 331373, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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