The effect of sales taxes is hotly debated. These taxes on consumption raise revenue for local governments, but do they also stymie business and hurt consumers?
In America, sales taxes are collected by municipalities and states and generally added to a good’s sale price at checkout. In many other countries, like France, “value-added tax” (VAT) is included in the stated sale price and collected by the national government.
A new study by the National Bureau of Economic Research looks at who benefits when a sales tax is repealed. In this case, in 2009 France reduced the VAT collected in sit-down restaurants from 19.6 percent to 5.5 percent (which happens to be the VAT charged at take-out spots). Policymakers who cut taxes often argue that the money firms or individuals would have paid will now be spent in other parts of the economy. In the case of firms, this is supposed to stimulate higher wages or the hiring of more workers; for individuals, increased spending on consumer goods.
Youssef Benzarti of UCLA and Dorian Carloni of the Congressional Budget Office — the nonpartisan Congressional budget analysis shop — find:
- Restaurant owners benefited the most from the tax cut, pocketing around 41 percent of the savings.
- Employees received about 25 percent of the cut without increasing hours; restaurant suppliers received around 16 percent.
- Consumers received the remaining 18 percent, as menu prices fell about 2 percent after the reform. The authors were not able to measure any change in food quality.
- The authors did not research the wider effect on society from the fall in tax revenues.