In France, regular restaurants pay a 20 percent value-added tax (VAT) on sit-down meals, while fast-food restaurants pay just a 5 percent tax on take-away meals. A group of large restaurant owners made the following pledge. If the nation were to cut its VAT rate on restaurant meals to 5 percent, the owners would
Cut the prices of restaurant meals by 5 percent, and
Increase the wages paid to waiters and dishwashers by 10 percent.
The owners predicted that these changes would increase the quantity of restaurant meals sold by 14 percent and increase restaurant employment by 40,000 workers.
Does the pledge of the restaurant owners make economic sense? We know that firms shift taxes forward to consumers in higher prices and backward to workers in lower wages. A tax cut will of course have the opposite effects. The restaurant market is highly competitive, so any decrease in cost will lead to lower prices as restaurants compete for customers. And lower prices will increase the quantity of meals served, increasing the demand for restaurant workers and their wages. So although the actual numbers in the owners pledge for lower prices and higher wages may not be correct, the pledge is consistent with the economics of tax shifting.