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VAT cut boosted eating out

It is unusual for economics experiments to be carried out, from which firm conclusions can be drawn. A recent one in Sweden involved the reduction of Value Added Tax for restaurants from 25% to 12% on 1 January 2012. Analysis of the results by the national statistical bureau SCB show that the monthly sales volumes for November 2012 were 7.2% higher than in November 2011. Café sales were up by 11.3%, and restaurants serving lunch and evening meals saw an increase of 10.2%. Adjusted for calendar differences and general price increases, the increase amounts to a 6.5% growth, against the general trend in the Swedish economy with a growth rate of just 1%.

Commenting on these figures, the local Metro newspaper reported that the number of employees in the restaurant sector had risen by 5,000 over the 12 month period. Interestingly, the tax cut had not led to immediate price cuts, though prices had stabilised. This suggests that restaurants had been able to charge the same prices as their customers were accustomed to paying but had been able to absorb rising costs due to inflation and other causes.

The EU commission has, unsurprisingly, questioned the effectiveness of the tax cuts in creating jobs but it takes no penetrating analysis to work out that tax cuts will eventually result in lower prices and that, consequently, more people will eat out in restaurants. Which these figures only go to confirm.

There will be knock-on effects too. Restaurants will become more profitable, and this will feed through into rents. In due course, some of this can be recaptured through the property tax. If the property tax was an LVT, at a substantial rate, most of the extra value would be recaptured as public revenue, demonstrating the general principle that since all taxes are at the expense of land rental value, a tax on the rental value of land could replace all existing taxes.