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

Aled ab Iorwerth and John Whalley

Canadian Journal of Economics, 2002, vol. 35, issue 1, 166-182

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.

Date: 2002
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