Pasty Tax "class warfare" fallacy
The largest argument, by largest I do mean loudest, to have come from the budget is the "class warfare" rhetoric from the shadow government and other opposition over the application of VAT on all hot foods.
It is, plain and simple, not class warfare. Yes VAT is a regressive tax given it increases the cost of general and lifestyle consumption decreasing the discretionary spending power of low-income earners to a greater extent than high-income earners. However:
1. Greggs, Sayers, etc. does not HAVE to push the cost of the tax through to the price of their goods now affected by the change.
2. Greggs is a profitable company with a 1.4% like-for-like sales growth 1 which meant they outperformed the economy as a whole for 2011.2 Which they have attributed to their "savouries", having looked at their online menu, this means the sausage rolls, pasties, pies etc. that are going to have the VAT applied. Basic economic principle in play here, supply and demand, the supplied price point intersecting demand here is very appealing to consumers so potentially they are under priced.
3. Consider the actual effect of the VAT on the price (assuming the full cost is passed on to consumers). A cornish pasty costing £1.50 is now £1.80 (the math 1.5*1.2). The marginal utility of 30p is very little to anyone. The opportunity cost is almost none existent.
4. Let's consider a substitute, its high-street fast food: McDonalds Big Mac is £2.49; Marks and Spencers Club Sandwich is £3; and Costa Coffee Chicken and Pesto sandwich £3.50. The price range in price difference is £0.69-1.70. Given that the UK dipped into negative growth last quarter 2011 and we are currently in a period some economists are referring to as "the Great Recession"3 here, pressure on essential living costs may move people down on their discretionary spending so Greggs, even with the price rise, becomes an affordable and attractive option.
5. Aggregating the cost of price rise over a year, assuming a 5-day week 50 week working year, is £1.50 a week or £75 a year. The price per week is actually less than the cost of the sandwich from Costa. How much better off would you be (marginal utility) to the tune of £1.50 a week? Not every, the opportunity cost isn't event a Sunday Newspaper.
6. The aggregated cost of the substitutes is £172-425. Now that is, relatively, an amount of money with real marginal utility and an opportunity cost.
This is pasty tax is something that should really be understood in context, granted the argument "we're all in it together" is hard to stress with the cut in higher rate tax because of the reported relative benefits of rate cuts. Its rhetoric, designed to sell papers and win political points with the swinging voters. If the opposition and the media want a better example of class warfare use the increased duty on tobacco products, though they won't, since a greater proportion of the lower social classes smoke4, its an addictive product with little real substitutes and will affect discretionary spending much greater than paying an extra 30p for a cornish pasty.
1. http://www.thisismoney.co.uk/money/markets/article-2122258/Greggs-vs-pasty-tax-City-analysts-assess-impact-VAT-furore.html?ito=feeds-newsxml
2. http://www.bbc.co.uk/news/business-17533800
3. I'm going to attribute the Great Recession to Paul Krugman because the first time I heard the term was from his blog/Op-Ed column http://krugman.blogs.nytimes.com/2012/03/07/europes-two-depressions/
4. http://www.nice.org.uk/nicemedia/documents/smoking_and_health_inequalities.pdf
Update - this is from one of my friends on his thoughts: "I thought about this last night and concluded that those 'out of touch' are the media and the Labour party for insinuating that the staple of a working class individual's diet is a pasty and the rich never touch them. Frankly, if I were 'the working class' I would find it outrageous that these people have such a low opinion of me.
