In an attempt to revive the fortunes of the French restaurant industry, where demand has been flagging during the recession, the French government slashed VAT on restaurant meals from the standard 19.6 per cent to 5.5 per cent from 1 July 2009. But how much of the tax cut will be passed on to customers; will there be an equal percentage price cut for all items on any particular restaurant’s menu; what will be the impact on consumer demand; and what will be the impact on the government’s tax revenue? The following articles look at the issues.
VAT cut paves way for cheaper restaurant bills France 24 (1/7/09)
Restaurants’ VAT cut from today The Connexion (1/7/09)
French diners feast on benefits after generous cut in restaurant tax Guardian (1/7/09)
France Whacks Food Tax The Wall Street Journal (2/7/09)
- Using a demand and supply diagram, demonstrate the effect of a VAT cut on the price of a particular item on a menu.
- Examine the factors that will determine (a) the average percentage price cut made by a particular restaurant and (b) the percentage price cut on a particular item on the menu.
- “One third of the VAT cut is supposed to help pay for price cuts with another third going to increase staffing. The final third should go to improving restaurant facilities.” Consider the likelihood of this occurring.
- “The measure will cost the French state 2.38 billion euros a year.” How, do you think, this figure was arrived at and how accurate is the figure likely to be? Are there any circumstance under which the tax cut could increase tax revenues?