Time Use and Food Taxation in Spain

We evaluate the welfare impact of changing the VAT on food in a context in which households can produce home meals for own consumption that compete with meals served in restaurants. Home production of meals requires the combination of food and time inputs. The fiscal treatment in home production of both the inputs and the final product differs from market production of meals, generating different channels of inefficiency. We calibrate a simple general-equilibrium model for the Spanish economy that identifies three types of consumers according to their income, and simulate the effects of some experiments related to how food is taxed. The results suggest that if we focus only on aggregate welfare, the model fails to capture important distributional issues. We also present some caveats to previous simulation results on aggregate welfare that are related to the importance of the elasticity of substitution between food and time in the household production of meals.