From today's Evening Standard:
More than two dozen of Britain's top pub and restaurant chains have joined forces to campaign for a cut in VAT to boost the country's ailing leisure industry. (1) They have joined together to back French hospitality entrepreneur and lobbyist Jacques Borel in his campaign to get VAT reduced from 20% to 5% on food, drink and accommodation in the UK.
Borel successfully battled for the cut in VAT in France that not only led to thousands more jobs in the leisure industry but also saw the government's tax take from the sector actually rise as more people went out... (2) Belgium, Germany and Sweden have also cut VAT in the leisure sector. Ireland joined the group last summer, cutting the tax from 13.5% to 9%. (3)
1) Well, that gives lie to the myth that "the consumer pays the VAT and it doesn't affect the supplier" doesn't it? If it made no difference to the supplier, then they wouldn't care, would they? If you look at actual facts rather than listening to politicians, you'd know that about two-thirds of VAT is borne by the supplier, and with discretionary spending like pubs and restaurants, it might be nearly all of it. And so that actually puts businesses out of business, unlike corporation tax which can't possibly push a low-profit business into making losses.
2) Yup, we also observed this with the car scrappage scheme, that was to all intents and purposes a refund to manufacturers of the VAT they would otherwise have to pay. The extra VAT receipts were slightly more than the cost of the scheme (so why didn't they just exempt new cars from VAT, you might ask...), and you can add the extra corporation tax, PAYE and dole money saved on top of that.
It's because having an extra 16.66% tax on gross profits ('value added tax') is sufficient to push the marginal rate past the top of the Laffer Curve. Part of the reason for the increase in tax receipts from one or the other industry which benefits is because consumers change their spending patterns in response to the slightly lower price and much greater output, so it would be unduly optimistic to assume that if VAT were abolished entirely that ordinary tax receipts on profits and wages (and dole money saved) would make up the shortfall, but even the most pessimistic assumptions (see my post on Laffer Rainbow) say that scrapping VAT entirely (revenues £100 billion per annum in the UK) would only lead to a £50 billion fall in total tax revenues. So the chances are that the growth in the overall economy would be roughly a much as the VAT cut and a smaller share would be channelled via the government. What's not to like?
3) So we'll have plenty of raw data for doing before-and-after comparisons.
Wednesday, 18 January 2012
Reduced VAT on pubs and restaurants
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16 comments:
Surely simpler assistance (and also help curb competition from cheap supermarket prices) would be to reduce the duty on cask ales/lagers and other drinks supplied direct to hospitality providers.
" two-thirds of VAT is borne by the supplier, and with discretionary spending like pubs and restaurants, it might be nearly all of it."
Precisely the wrong way around. Because eating out is discretionary spending, and there are many competing outlets, if VAT were cut for eating out, competition would rapidly reduce the price of meals by the amount of the VAT cut. Any outlet attempting to maintain previous pricing levels would rapidly lose custom, and go out of business. Thereby showing that most of the current level of VAT is paid by the consumer. The supplier might gain some long term benefit, due to increased trade, but the vast amount of the benefit would accrue to the consumer in the form of cheaper meals.
If what you said were true, that suppliers in the catering trade currently carry all the burden of VAT, then they should be able to maintain prices after a cut, and take the extra profit for themselves. That to me does not seem like a realistic analysis of the catering trade.
If on the other hand you took a product like tobacco, the market is not particularly competitive, there are huge barriers to entry, and consumers have a compelling urge to buy the product whatever the price. If VAT were taken off tobacco, prices would probably stay very similar to what they are now, thus showing the producer is paying the VAT, not the consumer.
"and there are many competing outlets"
Fast food outlets, yes, but "full service" restaurants, I doubt it. How many people "shop around" for the cheapest restaurant when they've decided on a night out? In my experience, what a different restaurants charge for what is basically the same dish varies wildly, which it wouldn't if there was price competition.
Price competition between different pubs and restaurants is fairly subdued. They're not offering a homogenous product and customers are also much influenced by location, atmosphere, quality of food and drink etc.
I'm not keen on the idea of a targeted VAT cut like this, because it's basically special pleading, but I would say if it happened a fair bit of it would go to producers, not consumers.
Anon 21.56. Wrong. Alcohol duty is exactly the same for supermarkets as for pubs. But VAT is much higher in pubs. If we were to scrap VAT on alcohol and increase alcohol duty accordingly to make up the shortfall, the price differential between a pint in the pub and a pint in the supermarket would from three-to-one to two-to-one. That's basic maths.
S, have you ever heard about supply-demand curves? Have you ever tried starting with facts and working back towards logic rather than deciding what you think the rules are and then claiming that the facts will fit your rules?
Simple fact is, for things like cigarettes where demand is price inelastic and supply is price elastic, the smoker pays the tax. We know this to be true because the final price of cigarettes in different European countries is wildly different and this is directly a function of the tax on cigarettes.
Where supply is less price elastic than demand, the reverse applies and the producer pays the tax. And it is a simple observable fact that suppliers bear two-thirds of the VAT.
But seeing as you are the sort of person who believes that reducing the tax on land increases the supply on land, I can't say I'm too surprised. Economics is not your strong point, is it?
B, good point, you pay for the decor, if you pay more than £5 o £10 for a meal then it is "conspicuous consumption".
C, yes, you yourself did a good summary of different prices in different pubs for the same product. Which sort of backs up what B said.
I'm intrigued at your Sherlockian skills Sir - which is to say how you correctly deduced that Anon at 21:56 wasn't me (and it wasn't, I have an alibi and people to back it up) and nor indeed some other anonymous -
Might I also point out, sort of in potential mitigation for the actual Anon 21:56, that he or she might just have been taken down the "change the duty rates to equalise competition by making supermarkets pay the same duty as pubs" by the CEO of Enterprise Inns - who was "lobbying loud" for this just before the recently past festive period (one suspects knowing all the while that he was sowing a complete canard) and getting some press coverage - because of course it was "the lower duty (ahem, cough, cough) paid by the supermarkets which allowed them to sell booze at below cost rates to the feral hordes who buy them, get pissed and go on the rampage". etc. etc. Oh and which kept people out of pubs, of course. This being the same CEO who at the time when EI shares were £9 was welcoming the smoking ban with open arms becuae it would see "non smokers" flocking to the pubs. He is now indulging in flam-flam because, much to his horror, the non smokers didn't, he now has substantially fewer outlets and EI share prices have completely tanked ...
Anon 00.41, it is true that up to know the "Save our pubs" people have been wailing on about beer duty being too high, so I can understand why a lot of people - such as Anon 21.56 - think that high duty is the main problem (apart from the smoking ban, which is not mentioned in polite company anyway).
That's what cheered me up about this article - the pub trade appear to have realised that VAT is what's doing for them (apart from the smoking ban, which you aren't allowed to mention etc).
According to the article Restaurant VAT is payed by the customer as reducing restaurant VAT is a reduction of the burden on customers Quote "as more people went out" Just pointing that out.
so why didn't they just exempt new cars from VAT, you might ask...
I'm guessing there is some minimum stipulated by the EU. In fact I'm surprised that 5% on hospitality is possible under the legislation.
The eating out trade is very competitive, and people do trade up and down the quality ladder on a regular basis, based on price.
I know lots of people in the food trade and its a cut throat business. One friend owns a restaurant in a town that recently got a Wetherspoons for the first time. Her restaurant is an upscale sort of place, not in the same market as JDW, but sales dropped off considerably when they opened. People trade down. Price has a big effect, even though the difference in quality is large too. I should know, I go to a JDW pub on a regular basis for precisely such pricing reasons.
As far as I see it whether VAT is borne by the supplier of or the customer is determined by the level of competition, ease of entry, and how price sensitive demand is. The Food trade is highly competitive, it is easy to get into (and out of - how many new restaurants/pubs open up and close down all the time), and it is highly price sensitive. People will either go to cheaper places, or not go out at all if they think prices are too high. Hence the problems in the pub trade, and the success of JDW and MacDonalds et al in this recession.
So in my view the food trade is an example of one where the customer does bear the large part of the burden of VAT.
What this all really shows is how regressive VAT is - on everything - as MW says. Just scrap it - now.
Den, what the man from Wetherspoons said was; "In the UK, supermarkets have been able to subsidise their alcohol sales on the back of non-VAT food sales. We cannot do that in pubs because we have to pay VAT on food."
Note how he said "we pay" and not "our customers have to pay".
QP, that surprised me too, I know for sure that the absolute minimum rate is 5%, but there appears to be a bit of wiggle room above that.
S: "The eating out trade is very competitive, and people do trade up and down the quality ladder on a regular basis, based on price."
I refer you again to Pub Curmudgeon's post which illustrates quite clearly that different outlets charge wildly different prices for the same food, what you pay for is "ambience". So that means that it is not particularly competitive.
"As far as I see it whether VAT is borne by the supplier of or the customer is determined by the level of competition, ease of entry, and how price sensitive demand is."
The key words here are "how price sensitive demand is" which proves my point from 23.35 yesterday (and disproves your own points):
- if demand is price insensitive (for example smoking, petrol) then the supplier can indeed pass on most or all of the tax.
- if demand is price sensitive (for example meals out, discretionary spending) then the supplier has to bear the tax himself as he cannot pass it on. If he hikes his prices, then he gets no business at all.
The reverse applies to the supplier.
- If supply is fixed, i.e. insensitive to price (e.g. land or housing) the tax is borne by supplier.
- If supply is price elastic (manufactured goods) the tax is more likely to be borne by consumer (or else manufacturers just go out of business).
So do not confuse price elsasticities of demand and supply - they have opposite effects.
So if we are looking at the market for any particular good or service, it's only a question of what is more price elastic - demand or supply. In the short term, a pub or restaurant is fixed supply. For sure they change ownership very often, but kitting them out is hugely expensive. Once kitted out, that's sunk costs and their only hope is to try and get the place full every night. So supply is price insensitive. But eating out is discretionary spending, so is price sensitive.
Ergo, the bulk of VAT is borne by pubs and restaurants. Which is why, quite rightly, they are campaigning for it to be reduced.
L, if you strip out VAT on essentials like booze, fags, petrol, domestic fuel, VAT is neither regressive nor progressive, that is not the point.
The point is that VAT is a total job killer and business killer; a huge distortion between VAT-able and non-VAT-able; it acts as a barrier to entry (the £73,000 threshold is an extreme example, but it applies at whatever scale).
So the total removal of VAT on food eaten in at pubs etc would have zero impact on prices then? Everyone would maintain exactly the same prices as before?
S, try finding out what happened in all the countries which reduced VAT rates!
I never said "zero impact". I said, two-thirds of VAT is borne by the supplier, so my assumption is that prices would come down by one-third of the VAT cut, i.e. by 6% or so. In the food sector maybe, less, in the alcohol sector maybe more.
The more important impact is that marginal businesses would become profit making instead of going bankrupt, ergo, the total number of pubs and restaurants would increase by (say) 5%, each one would employ a few more people, and they'd have much higher net taxable profits, which why the overall tax receipts from the sector would remain much the same (see excerpt).
S, see my new post re Ireland. Their figures say that 40% of the cut was passed on in lower prices.
MW - perhaps I meant 'depressive'?
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