Question

Your state needs to raise tax revenue. A politician suggests that the government place a tax on food because everyone eats and, thus a food tax would surely raise a great deal of tax revenue. However, since the poor spend a large proportion of their income on food, the tax should be collected only from the sellers of food (groceries stores) and not from the buyers of food. The politicians argue that this type of tax would place the burden of the tax on corporate grocery store chain and not on poor consumers. 1) Can your state legislate that the burden of a food tax will fall only on the sellers of food? Why or why not? Who in your opinion do you think the burden of a food tax will tend to fall on, sellers of food or the buyers of food?

Answer 1

A tax on food would have effects different from what is stated above. Food as a whole doesn't have substitutes though different food items would have substitutes. This implies that the demand for food would be inelastic ie even a higher change in price would do small change in quantity.

Eg: if there is tax on every food item, people would not reduce the quantity they eat below the bare minimum because that would be essential for survival.

Hence there would not be much change in the quantity demanded of food.

Also even if the tax is on sellers, the sellers also know that there is an inelastic demand for food , so they would try to transfer the burden of the tax on buyers and not pay the whole tax.

Hence the consumers suffer no matter on whom the tax is because the demand is inelastic and there is no close substitute of food.