Saturday, 12 January 2013

"VAT cut boosted eating out"

Here's a good summary of what happened in Sweden when the VAT rate on restaurant meals was cut from 25% to 12%.

The results won't surprise anybody who understands VAT (i.e. people who read this blog), but it's nice to see more firm evidence.

UPDATE: James James refers us to this more detailed post, also worth a read.

20 comments:

Rich Tee said...

How did they do that? I thought that VAT could not be reduced below 15 per cent as that is the EU minimum.

Mark Wadsworth said...

RT, that's the interesting question, isn't it? Other countries (France and Ireland, from memory) have also reduced VAT on restaurants in the past couple of years.

Kj said...

you are allowed to have reduced rates, even zero rates, to a certain extent, I haven't fully understood the terms, but food is frequently reduced.

Pavlov's Cat said...

Call me cynical , but I don't think it would work here. Most places I'm sure would leave prices unchanged and rub hands at a bigger profit

Mark Wadsworth said...

Kj, the rules are murky, to say the least.

PC, that's the whole point! Read the article.

VAT is not "borne by the consumer" or "added to prices", it is borne to at least two-thirds, possibly more, by the producer/his employees.

So of course there were no significant price falls, but there was a large increase in people willing to go into the catering business (as businessmen or as employees).

. said...

I had a good chuckle the other day when someone on a blog commented that the obvious way to stop Starbucks et al. avoiding profit taxes was to introduce a turnover tax. "A bit like VAT?" was my question...

BE

Physiocrat said...

There were almost no price cuts in Sweden because the restaurants continued to charge the prices that people were used to paying. But prices have been held down over the past 12 months even though costs have risen, and the sector has experienced 6% growth, against th3 1% growth in the economy as a whole.

The reduced VAT enabled restaurants to absorb the rising costs.

Lola said...

MW Thanks for linking to the article - it made me aware of the LVT Campaign blog.

Lola said...

On a general point there is a lot very seriously wrong with politics, government, bureaucrats and tax in the UK. Perhaps it's just that democracy is a crap idea as it enables one bunch of people to legalise theft from another bunch of people.

Mark Wadsworth said...

BE, and how did they reply to that?

Ph, yes, that's what the article says.

L, as Churchill said, the average voter isn't all that bright and half of people are stupider than that. It's still the only sensible way of doing things.

Bayard said...

The best system is, and always will be, a benevolent dictatorship. The problem is always how to find the benevolent dictator. Obviously anyone proposing themselves for the job is far too ambitious to be considered.

Woodsy42 said...

"The best system is, and always will be, a benevolent dictatorship. The problem is always how to find the benevolent dictator."

We sort of had one Bayard, he was called the king. Being born to it prevented any sort of self-promotion or shirking, although benevolence wasn't guaranteed. You could say they were conscripted to the role.

We chaind ours via parliament and ended up with what we have now. The french removed theirs somewhat more impolitely and look what they have now!

So do you fancy going back, not sure I want to. But you are right, if only one could ensure benevolence.

Mark Wadsworth said...

B, exactly. But even if such a person is benevolent when he takes over, it soon goes to his head.

W42, well that's a ruthless history re-write. Originally, English kings were elected, i.e. the senior guys used to elect one of themselves to the job.

Mark Wadsworth said...

... and the Germans had a similar procedure. The idea that being king is hereditary was invented by the Normans (the bastards).

James James said...

It's more than that.

http://super-economy.blogspot.co.uk/2012/08/sweden-cuts-consumption-tax-for.html

" The neutrality principle implicitly assumes that all economic activities are equally tax-sensitive. Ramsey's principle of optimal taxation dictates that we should tax activities proportional to tax sensitiveness. Different economic activities differ in price sensitiveness. For instance taxing land has a very small effect of supply whereas taxing foreign capital can substantially reduce supply.

For consumption taxes the overriding principle has been to equalize taxes across goods. This is sometimes claimed to be optimal taxation. But I disagree. In Gary Beckers model of household production the ability of households to create substitutes is different for different product categories. Households cannot themselves build high-tech goods such as electronics or vehicles regardless of how high the sales tax is, but can easily produce close substitutes for many services, such as transportation or eating out. Because of this taxes on services can reduce labor supply more than taxes on goods."

Bayard said...

"The idea that being king is hereditary was invented by the Normans (the bastards)."

Well, if you look at the Anglo-Saxon kings, they were all pretty closely related. It's like being on the board of Sir Robert McAlpine Ltd, it's not hereditary, but your surname has to be McAlpine.

Mark Wadsworth said...

JJ, good post, I have linked.

B, yes, the dozen top warlords used to elect one of their own when there was a vacancy (unless the job was taken by force, but this didn't usually last long), in Germany, the top dozen warlords got to vote (the "Kurfürsten) and the bloke who ended up being elected was nearly always a Hapsburg, but the principle stands.

Bayard said...

Yeah it sorted out the "king dying without an heir" problem pretty nicely; it took just over seventy years before the Norman system plunged England into civil war, for just that reason.

. said...

So we would want to see a benign dictator who was chosen by a small elite circle of grandees?

How could we achieve such a glorious system?!?!

BE

Mark Wadsworth said...

BE, I don't think you can, unless you can point us to some examples of this happening and being sustainable in the long term.