What is the optimal tax rate on restaurants?

bhauth asks me:

What do you think the optimal tax rate on restaurants would be? The current rates seem high to me:

1) The marginal substitution rate between restaurants and cooking at home is high.

2) Cooking at home uses untaxed labor. Cooking in restaurants uses taxed labor, and then customers pay sales taxes on that taxed labor. Those sales taxes are often *higher* than normal sales taxes, because food from restaurants is a “luxury good”.

Putting aside general fiscal considerations (e.g., to which other taxes are we comparing it?), I see a few main questions here:

a. Yes, eating in restaurants contributes to weight gain, but how much is that a self-control problem vs. an internalized decision of cost vs. benefit?

b. How much do cheap restaurants encourage families to have more children, a social positive in my view?

c. How much do cheap restaurants take away the bonding that arises from the family dinner table experience?  And how often is that bonding a net negative with lots of fights and screaming?

d. Will taxing restaurant meals — as opposed to specific taxes on meat — on net lower beef-eating and carbon/methane problems?

e. Do restaurant food suppliers treat farm animals better or worse than do suppliers of home-cooked meals?

I say a-e are mostly hard to measure, so this gives us a common problem in economics: you have one clear, and significant, effect, and a bunch of hard to measure effects which are hard to assign a net value to.  Should you be willing to recommend policy on the basis of the one effect you can clearly see, and then widen the confidence bands?  Or should you just keep your mouth shut altogether?

What if your audience finds a blog post like this one too complicated or too annoying?

Comments

Sigh. How about: the optimal tax rate on restaurants is the rate that raises enough revenue to fund the government, spread equally across economic activity so as to not distort the market?

+1. Please stop nudging and manipulating other people. I really do not care what you consider a “social” positive or negative.

BTW, a corollary of not projecting your ideas of good and bad, “funding” the government should be limited to police, judiciary and national defense. Actually, ideally not even those.

I really do not care what anyone else considers too complicated or too annoying, actually.

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Exactly should would a voter in his own kitchen care about government planning in the restaurant business? Food safety? OK. Restaurant central planning makes us dress nicely on occasion, frig the government, none of its business.

Fairness and equality; You tax them the same as any business. The objective should be to lower all taxes not to see how much we can take from people and businesses. Easily half of government funds are spent on things they have no business meddling in and I think I could argue that 3/4ths of all government spending should be eliminated.

So in other words, optimal taxation is totally unrealistic and the idea should be scrapped. Got it.

Or in other other words, optimal taxation can actually be measured and judged using data, assuming that optimal is not defined as perfect.

Hammond (1979) already proved 40 years ago under very reasonable assumptions that it is impossible for taxation to not distort economic activity.

+1

Taxes are too damned high.

"Optimal Tax Rate" - optimal for who/whom?

Right. A VAT. A restaurant adds value to inputs (be that lobster or just noodles). Tax that addition.

'Cooking at home uses untaxed labor'

No it doesn't - not every single activity performed by every single human is labor which can be taxed.

'How much do cheap restaurants encourage families to have more children'

Well, the rise of fast food and cheap chain restaurants in the US is historically correlated to a declining birth rate, so using the past as a guide, such restaurants are not a social positive, at least from a data driven view.

I suspect that having more kids relative to the national average is correlated with the density of fast food restaurants.

Who knows? Notice that Prof. Cowen did not use fast food as a term, but cheap. Olive Garden, Applebees, etc. would seem to fit into that category - and they are likely found precisely in the areas where the decline in birth rates has been most noticeable over the last 50 years.

And to be honest, fast food restaurant density likely mirrors that of Olive Garden, Applebees, etc. to a significant (though not identical) extent - fast food restaurants go where the money is, after all.

I think cold winters and couples-in-love also contribute to rising birth rates.

Don't believe me. Ask Rachel Campos Duffy. She and Congressman Duffy (R-WI) are expecting their ninth gift from God.

Finland has cold winters (and long as well) but suffers from low fertility. Not enough couples in love?

God bless you Prior!! You managed to refute your own point in less than two sentences.

Labor that cannot be taxed IS untaxed labor.

And here I was, thinking that the point hinged on the idea that every human activity could not be defined as 'labor.' Though it seems that the point 'not every single activity performed by every single human is labor which can be taxed' was easily misunderstood by someone who feels 'Labor that cannot be taxed....' means all human activity can be considered labor. A point I was attempting to explicitly reject, but apparently without being clear enough.

Again, not every human activity can be considered labor - taxed or untaxed.

It's not "labor" because there is no "surplus value" being directly captured by the evil, greedy capitalists in the case of household production.

My guess is that cheap restaurant cooking is more energy efficient and less wasteful of food than cooking at home. After all it is basically mass production. So taxing it will increase CO2 emissions.

Although I am a mild AGW skeptic I favour a carbon tax because it is not a bad way to tax activity and it would avoid potential distortion like this.

Tyler wants cheaper restaurant meals. No surprise there.

Restaurant meals are final sales. Tax all final sales (bar rental housing) at the same rate, without abatement or exception. All employers (public, commercial / industrial, and philanthropic) are bound to collected and make contributions for Social Security, Medicare, and unemployment compensation. None of your questions are of any significance. The impulse to ask them is derived from your initial observation that home cooking readily substitutes for restaurant meals. Well, DIY dads substitute for contractors (and used to be able to substitute for auto mechanics as well), family members substitute for day care services and chore services (commercial and philanthropic), fathers and sons substitute for lawn and garden services, clergy substitute for counselors, &c. There's no end to this. Fuhgeddaboutit.

on question #2 about a a higher sales tax.

So far, nobody has mentioned alcohol. I know the alcohol laws for Texas and a few counties around Corpus Christi, so this may no apply to other places.

First, you can only buy liquor (>17% alcohol) in liquor stores. Those stores are allowed to work from Monday to Saturday. Thus, you cannot buy a liquor bottle on a Sunday. But, you can buy bourbon shots in a restaurant along your meal. Alcohol sales end at midnight everyday, but you can buy alcohol on a restaurant until 1AM.

Lowering the sales tax in restaurants would be seen as making the Tools of Satan........sorry, beer and wine more accessible to people. Some brilliant entrepreneur may also profit from a loophole in the alcohol sales laws once taxes are lowered and the business becomes possible.

So, it may no be luxury taxation but prudish taxation.

17%? Is that aimed at the sherry- and Madeira-sipping classes? Or, indeed, Port or vermouth? If so it's a scandalous attack on Western Civilisation itself.

It seems odd that Texas would use 17% alcohol as the definition for liquor. In Virginia, there's restrictive laws on sale of liquor (as in, you can only buy liquor from these ABC stores run by the state), but high ABV sweet wines like port, sherry, and madeira are all classified as wines, and can be purchased at the supermarket (port and sherry make up ~100% of my at-home alcohol consumption, and I always buy at the local grocery store).

Alcohol should be taxed at distribution, at a flat rate per equivalent ounce (lowering the cost of mild lagers vs IPAs) and so the restaurant contribution just becomes VAT again.

Trivia: In California you can buy any liquor you want at any 24hr supermarket.

Californians regard it as an essential civil right to be able to go into a drugstore at midnight on a Sunday and buy a bottle of gin and a television set. This has been true for many years.

If you ever have insomnia and to to a market or drugstore at 3am you see things .. you see things, man

Regarding point e. "Do restaurant food suppliers treat farm animals better or worse than do suppliers of home-cooked meals?": much worse as far as chickens are concerned. The latest figures for France show that 42% of shell eggs purchased by consumers are from non caged hens
consumers whereas restaurants almost exclusively use liquid eggs from battery hens for instance. Also, it is much easier for consumers to pressure relatively large suppliers into compliance to higher ethical standards for these kinds of things should society be moving that way than to convince the dozens of thousands of mom-and-pop restaurant entrepreneurs to buy their eggs from somewhere else than the local one-stop shopping wholesaler (usually Metro), especially given that even die-hard free-range egg fans never ask a waiter what kind of eggs they use.

Optimum restaurant tax rate is zero, from the citizen perspective.

Why must restaurant service be taxed at all ?

One cannot rationally assess a single tax source in isolation from the many other taxes imposed, nor from the end objective of efficient government services.

In general, government politicians ALWAYS want more tax revenue. The American tax system has thus expanded to a bizarre level of complication & wealth-extraction -- with which no one is happy.

Can there be a single, universal answer to the value-laden question of the optimal tax rate to apply to restaurants? Some types of restaurants can indeed provide many valuable services: social bonding (unlike Korean restaurants catering for solitary eaters), social mixing (think Singapore's food courts, where you use communal tables and get talk daily to people from all walks of life), developing the interest of people raised by parents with no culinary culture in multiple food groups (again, Singapore, and unlike most fast food joints), helping with tourism, etc. Most developing countries with low restaurant diversity or food deserts would clearly benefit from more tax incentives for restaurants from virtually any perspective. The rules to access these incentives would of course have to be properly discussed and probably include certain conditions such as actually preparing the food, having (communal?) tables, or actually serving proper food, not deep-fried pizza or snickers. Then again, wouldn't the tax breaks be exploited by landlords? Is it a good idea to have increasingly complicated tax regimes? Is any given government actually legitimate in wanting to nudge its citizens through its tax system? Open question, indeed..

What is the optimal tax rate on trolling?

Try adding cost to the benefits.
Restaurant customers will demand government food inspections, and pay the extra cost. None of the listed cost/benefits have anything to do with government unless one is a central planner.

At my grocery store, which is the greatest in the universe, and hopefully someday books will be written about its founder, Harold E. Butt, I can take one of their in-store-produced almond croissants (which I admit I do from time to time despite having vowed not to eat almonds anymore) from the bakery case and pay for it at the cashier, no tax. Or I could ask for the same croissant forty feet away, from the display case at the smoothie/coffee bar, and there pay an extra 20 cents.

But the latter would be sinful, compounding the almond-eating sin, so I don't.

I don't smoke, nor drink much, nor have any need of strip joints, so I have to look for opportunities to be a good citizen and appropriately respond to incentives. Also, I get to keep a couple of dimes, and dimes are shiny and my favorite coins.

Always good to hear from a normal person. Please keep posting.

Thanks, but I feel bad - I misspoke, it was of course Howard, not Harold!

I used to live in Texas, HEB Pantry was slightly on the pricey side, but I guess sometimes you get what you pay for.

BTW, as a Norwegian, with VAT experience, I need to boost today's date:

https://www.forbes.com/sites/davidnikel/2019/05/15/syttende-mai-how-norway-celebrates-its-national-day/

of course there are many other taxes on restaurants other than the obvious sales tax on patron checks.

Property taxes, utility taxes, business license fees, labor taxes, etc.
Everything the restaurant owner purchases for restaurant operation is taxed directlyly or indirectly -- food, dishes, pots, stoves, refrigeration units, tables, furnishings, etc. Everything delivered by truck pays vehicle fuel taxes and the trucking firm pays many other taxes to operate his firm -- all these taxes ultimately show up in the restaurant checks presented to patrons.
Where does all that tax money go?

Social insurance contributions ('labor taxes') apply to any employer, not just restaurants. Property taxes are properly local, and should apply to any property holder outside of slums and points adjacent, with rebates from the state treasury for philanthropies. Business license fees should be limited to the assessment necessary to finance the work of the registry from which you secure the license. Assessments on particular goods and services should either go into dedicated funds (e.g. a motor fuel tax financing road maintenance) or should be held and then rebated to the general public on a per-filer basis (in the case of Pigou levies and vice levies). I believe as a general rule sales taxes are not assessed on intermediate goods e.g. restaurant supplies.

This is the second time in recent weeks you've mentioned Pigou levies being rebated to the public.

Forgive my ignorance, Art (I am pretty provincial): is this a thing that happens anywhere outside of your head?

Families fighting and screaming?

Dude, where do you dine; at a Denny’s in New Jersey?

We get it man. You go out of your way to avoid black people. Find a new shtick or go back to Daily Stormer.

Whats clear is that you are a one trick pony.

When i picture new jersey, i picture the dolts from jersey shore.

Obviously you are only able to see one thing regardless of topic

It’s nice to know that your views of people all stem from MTV. No wonder you’re a bigot. It must really bug you when Cribs comes on and you see all those wealthy black men showing off their property. How dare they live lives you don’t approve of!!! To the back of the bus!!

This is an interest demonstration of projection. Are you wearing a ball gag and diapers while you do this?

I always think it is interesting how some folks are concerned about how the profits of restaurants will be affected by taxes on the owner (which they say will raise restaurant prices and thereby reduce consumption)

While

They also prefer sales taxes, which probably raise the price of the restaurant meal more.

What is interesting here is that sales taxes have probably have less effect on consumption because sales taxes are not visible on the menu and appear later.

taxes are taxes -- no matter what fancy label is attached to them.

Payroll/Labor taxes are not "insurance" premiums --they are purely taxes under U.S. law and repeated SCOTUS rulings.

government officials forcibly take money from citizens

if you somehow think taxes are voluntary -- stop paying them and see what happens.
and if you think you are under-taxed -- all levels of government will eagerly accept your generous cash donations beyond your legal tax liability.

government officials, elected by us, forcibly take money from citizens,

and

give it back.

If I lived in a boarding house room, then restaurants might be the only place (in inclement weather) I can sit and have a meal - how is that a luxury? The whole post is full of hidden assumptions - mostly about social engineering. Oddly, for a supposedly economics blog, job creation and economic growth aren't even implied to be part of the consideration. And what about "inequality"? Should (say) "Mexican" restaurants be taxed at the same rate as "American" and monstrosities like Taco Bell? and should zero star ones have the same tax rate as the 4 stars? I love it when TC writes about "putting aside" "general considerations". Does that include the law of supply and demand? how about the laws of physics? I've several answers: 1. Zero. 2. As high as possible. 3. Low for my "friends" (contributors) and High for everyone else.

Tyler's been going through some kind of phase lately. I call it slumming. And this OP was particualarly weak and trolly.

Here's a paper that argues that, to avoid distortions, taxes should be low on services that are substitutes for untaxed household production:

The present paper suggests that optimal tax theory offers more guidance for tax policy once it is recognized that many services supplied from the market may also be produced within the household sector where they cannot be taxed. We are thinking of ‘consumer services’ such as house repair, repair of other consumer durables, cleaning and window-cleaning, garden care, housekeeping, cooking and dish-washing, haircuts, etc. The analysis below indicates that it is optimal to have a relatively low tax burden on such consumer services. In our model economy, taxes distort the choice between the consumption of services and the consumption of other goods, the choice between labour and leisure, and the allocation of labour between home production and market production.

Fine in the abstract, but kind of crazy in the real world. You fix your own leaky faucet because it's $10 in parts vs a $150 plumber's minimum.

Not even close. Washing windows? A bucket of water.

And yet many people do pay to have their leaky faucets fixed, windows washed (and meals prepared). And more would do so more often if not for distortions cased by taxes on services. Think on the margin.

There is a place for the margin, but 10x isn't it.

Trivia: I think I am the only one on our street who clears his own brush before fire season. But to be honest, it's not the money. I think it is dangerous, manly, good exercise. A weed wacker and loppers on a steep slope.

So maybe too not completely rational decisions.

Lets run government like a business.
The optimum tax ate is that which brings in the greatest revenue.

Sound good. As long as we have the same anti-trust rules for government as for business (breaking up any governments exploit monopoly market power by charging peak-of-the-laffer curve tax rates). As long as there is tax competition between government entities and low-friction foot-voting, government units should set whatever taxes they like and see whether they attract or repel new residents and businesses.

Is that what you had in mind?

You all are in luck -- I have a lot of time this morning, and this calls for a good old-fashioned Fisking.

>a. Yes, eating in restaurants contributes to weight gain

Literally no one asked. Try to focus here.

>b. How much do cheap restaurants encourage families to have more children

Exactly zero. Have you ever left campus? No one in history has ever said "Honey, let's shag... the 99-cent menu is back at Burger King, which should easily make up for another $115,000 in college costs."

>How much do cheap restaurants take away the bonding that arises from the family dinner table experience? And how often is that bonding a net negative with lots of fights and screaming?

This is a deeply disturbing view into your childhood, but putting that aside, more conversation and bonding takes place out at restaurants than at home.

>Will taxing restaurant meals — as opposed to specific taxes on meat — on net lower beef-eating and carbon/methane problems?

No one has ever discovered a "carbon/methane problem." Also, beef is much more likely to be eaten at home, where it is much cheaper. When something is cheaper, it gets consumed more. Perhaps you could look into that phenomenon. Check the internet.

>Do restaurant food suppliers treat farm animals better or worse than do suppliers of home-cooked meals?

Besides murdering them, you mean?

"This is a deeply disturbing view into your childhood". Yowza, that one jumped out for me too. tmi.

"Do restaurant food suppliers treat farm animals better or worse than do suppliers of home". Actually, comparative sourcing and supply chain is the only legit question on the list. It's pretty clear that the food service business overall is a huge supporter of factory farming, but on the other hand supports bulk pack and utilization of seconds-tier quality.

>Putting aside general fiscal considerations...

Isn't that the question bhauth asked?

See? I'm not banned, I'm just a liar.

My dream is one day to see a comment thread of only Thiago usernames. But at least one of them has to be the “real” Thiago.

The ban has been lifted.

Eating in restaurants doesn't necessarily cause weight gain. Many of us eat healthier foods in restaurants that we are too lazy or too busy to prepare ourselves. Eating in restaurants helps me stay fit.

Mothers who work outside the home often find themselves relying on carryout dinners to keep families fed when schedules get hectic. For them, it's a necessity, not a luxury, and taxing restaurant food gives those parents one more burden to bear.

So, you cut the sales tax on that meal and raise sales taxes somewhere else to make up the revenue. That in turn creates a burden for someone else. There's really no end to this.

A higher population density can be achieved if homes do not have kitchens. The taxes on delivery and restaurant dining contribute to sprawl.

One may as well ask, "What is the optimal tax rate on microwave entrees?" It's true that the meal is consumed at home, but practically all the actual food prep. was done in a factory.

Although if you went down this path you'd have to evaluate practically all food products along a prepared-vs-raw scale. Is a packaged ready-to-eat sandwich more prepared than a can of soup (because, although you could eat the soup cold out of the can, you'll probably heat it)? Is a microwave mac-and-cheese entree more prepared than a boxed mac-and-cheese dinner?

Yes, it's a reductio ad absurdum. But, some states that exempt food from sales tax nonetheless tax ready-to-eat foods, such as a Hostess cupcake. Nonetheless, how about if you quit with the nudging already, and just use taxes neutrally to produce revenue?
______________________________________________________________________
a. Yes, eating microwave entrees contributes to weight gain (they're often loaded with HFCS, starches and salt), but how much is that a self-control problem vs. an internalized decision of cost vs. benefit?

b. How much do microwave convenience foods encourage families to have more children?

c. How much do microwave entrees take away the bonding that arises from the family dinner table experience (because it encourages solo food grazing as opposed to all eating at the same time)? And how often is that bonding a net negative with lots of fights and screaming?

d. Will taxing microwave entrees — as opposed to specific taxes on meat — on net lower beef-eating and carbon/methane problems?

e. Do convenience food suppliers treat farm animals better or worse than do suppliers of home-cooked meals?

" Do convenience food suppliers treat farm animals better or worse than do suppliers of home-cooked meals?"

Word to the wise: never, ever, microwave a cow. 'nuff said.

"3. How much do cheap restaurants take away the bonding that arises from the family dinner table experience?"

Families sure matter, but hopefully we singles do as well. For singles, a chance to eat out among other people and, with luck, have discussions with strangers can be very valuable indeed.

Is there a comprehensive literature on the effects of different types of taxes stacking on top of each other? This is one of OPs main complaints, but it truly impacts everything, and yet I don’t see much sophistication on this point more generally

The restaurant market is probably efficient, so I would not tax it in excess of the regular rate.

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