Question

  Following a heated debate in microeconomics class about taxes, one student suggested that taxing food will be a good way to raise revenues because demand for food is inelastic.

a) In what sense taxing food a “good” way to raise revenues?

• Taxing food is “good” because to some extent food purchases are inelastic as it is a necessary good needed for survival.

b) In what sense is it not a “good” way to raise revenue?

c) Will you support the idea of taxing food? Why or why not

Answer 1

b) Taxing 'food' cannot be considered a good way to raise revenue although its demand is inelastic. It is so because food is a necessity to life. If it is taxed, then it is going to impact people in all the income classes. Moreover, it will impact lower income strata more than upper income strata because people in lower strata have higher marginal propensity to consume in case of necessities whereas people in upper strata have higher marginal propensity to save. In this sense it will be a regressive tax policy. The food tax may lead to increase in poverty and inequality and arrest economic growth. Therefore, the positive effect of increased revenue from such a tax will be nullified by a downfall in economic growth due to decreased consumption expenditure.

c) I will not support the idea of taxing food. The reason is that food is a necessity. If it is taxed then its impact is more on poor people. It is so because poor people have a higher marginal propensity to consume and that too in case of necessities to life. As compared to rich people have higher marginal propensity to save. Therefore, such a regressive tax cannot be supported.