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Jan 25, 2019 in Analysis

Taxes on Food

Abstract

Thanks to the government every one of us lives in a civilized society. Collection of taxes is a condition of the state existence, and that is why the government obliges all taxpayers to pay taxes regardless of their will. Setting the taxes the state seeks primarily to secure the necessary material base for the implementation of the tasks assigned to it, which are implemented by means of tax policy, which, in turn, is a part of the state financial policy. In addition, the properly constructed taxation system is affecting the effective functioning of the entire national economy. Namely, the tax system is the main subject of discussions about the ways and methods of reform. Furthermore, the food products did not become an exception in tax policy, getting to the category of taxable goods, due to the fact that these goods are the product of mass consumption among the population.

Keywords: tax, taxpayers, food, tax policy

Taxes on Food

The tax system is a powerful tool of the economic management in market conditions. The correct construction of this system depends on the efficient functioning of the market. In this work, the element of the tax system, taxes on food, will be reviewed in details.

Taxes on food are a very important and an often-discussed question in the global community in the recent years. Taxes on food are the taxes used in the system of national accounts (SNA), whose value depends on the value of manufactured products. These taxes include: sales tax, value added tax, and excise duties.

Each of the above mentioned taxes is considered in the more details in the data below (Nelson, Collins& Healy, 2008):

1. Sales tax is a type of consumption tax, which is charged directly during the purchasing of certain goods and services in the point of sale. The size of sales tax is usually set as a percentage of the taxable price during the sale. Some products and services can be released from this tax, because the laws for the sales tax typically contain a list of exceptions. The laws regulating the procedure of tax administration may require the sales tax to be included in the price or added directly to the price in the point of sale.

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In most countries the sales tax is charged by the seller from the buyer, and then the seller transfers the received amount to the governmental tax service. The sales tax is charged only during the sale of the goods or services to the final consumer. Tax systems that use the sales tax often contribute to the economic growth, savings, and investment growth. Organization for Economic Co-operation and Development (OECD) explored the influence of the various types of taxes on the economic growth in the developed countries, and found that the sales tax is one of the least harmful taxes for growth (Creedy, 2003).

Several economists believe that the sales tax is obsolete in the contemporary world, as it is a larger tax burden to the individuals with low income than to the individuals with higher income. However, this negative effect of the sales tax could be prevented, for example, by exemption from paying it when purchasing some essential goods, such as food, clothing, and medicine.

2. Value added tax (VAT) is an indirect tax, the form of exemption of a part of goods’ value to the state budget, which is created at all stages of the goods production process, and shall be entered to the budget with the implementation.

The final consumer of the goods pays to the seller the tax on the whole value of the acquired benefits as a result of the application of VAT. However, this amount starts arriving to the budget before the final implementation, as the tax on its part represents the value “added” to the value of purchased raw materials required for production. VAT shall be paid to the budget by everyone, who participates in the production of goods at the various stages.

3. Excise taxes are a kind of indirect taxes, which are a part of the selling price and are a subject to being fully deducted to the budget. Basically this tax is installed on the consumer goods and is included into the price of the goods and paid by the buyer.

Excise goods for the food are recognized:

  • ethyl alcohol of all kinds of raw materials (except cognac spirit); 
  • alcohol-containing products with inclusion volume fraction of alcohol more than 9%;
  • alcoholic products (alcohol drinking, vodka, alcoholic beverage products, brandy, wine, and other food products with a volume of ethyl alcohol of more than 1.5%, except for a wine);
  • beer. 

Talking about the taxes on food, it is important to underline that there is a group of compulsory goods, which the tax is being charged from. These foods are as following:

  • food from soup, salad, or dessert bars;
  • party platters;
  • heated food;
  • sandwiches suitable for immediate consumption;
  • ice cream, frozen yogurt, and other frozen desserts sold in containers.
 
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However, there are certain foods that are exempt from the taxes on food. Such products include (Krishanan, 2014):

1) baby food products of own production aimed at increasing of production volumes and reducing the retail prices of these products. Special baby food products are recognized as a production of own manufacture, if they have been entirely produced in the specialized shops of the enterprises regardless of their ownership;

a) milk, fruits, and vegetables purchased from the domestic producers under the contracts or from the population, which is evidenced by the certificates of local executive authorities;

b) fruit and vegetable by-products, cereals and cereal flour manufactured by the domestic enterprises from fruits, vegetables, and grains;

2) In addition, the taxes are not applied to the snack food for consumption off the premises, or to the sale of snack food through the vending machines.

Tax on Unhealthy Food

In recent years the question about the introduction of an additional tax on the unhealthy foods, or the so-called “fat tax” is being actively discussed. Burgers, chips, sparkling water, butter, and even whole milk get under attack. The reason for the introduction of additional tax or VAT on the most popular products is appeared as a result of increasing the risks of heart disease and diabetes caused by the population’s obesity. 

The scientists propose to introduce a 20 percent tax on the unhealthy foods, the proceeds from which could be spent on reducing the prices for healthy foods - fruits and vegetables. However, the Federation of Food and Beverage reported that such kind of tax on the products would be harmful both to the buyers and to the economy (Cordes, Ebel, & Gravelle, 2005). It would cause a big blow to the wallet and health of the poor families.

In order to combat the problem of obesity, the UN specialists offered to impose everywhere the tax for fast food and other foods that contain high quantities of sugar and fat. In the countries, where this kind of tax was imposed, the manufacturing companies were seriously affected, as they were forced to seek for the new markets.

The introduction of this tax will lead to the fact that the enthusiasts of hamburgers will pay twice. Since this kind of food relates to the goods, which necessarily have to be taxed, the introduction of a new “fat” tax will be also charged a supplementary part. But this does not stop the experts, who insist on imposing the tax on fast food everywhere citing on the excessive harmfulness of this food.

The very idea of a tax on fast food is not new. This measure is already in force in some countries. In the United States the tax on burgers and chips is introduced in several states. In Europe, the first country, which introduced a tax on sparkling water, was Denmark. Finland overlaid the collection on cola and chocolate. In 2011, Hungary followed the suit. Budapest introduced a tax on foods that contain high levels of fat, sugar, and salt. This tax is called “tax on chips”. The proceeds from it are spent on healthcare. The Romanian Government has also introduced a tax on fast food. However, the difficult economic situation has forced the authorities to temporarily suspend this measure. An additional charge made food prices too high (Grown & Valodia, 2010).

In such a way talking about the taxes on food it is necessary to emphasize that it is a comprehensive tax containing a number of components. And with time the number of taxes included to the taxes on food will increase due to the growing use of genetically modified products, which lead to the problems with people’s health. The plan for imposing the tax on “harmful” food was considered as an example.

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