Everything But the Bagel Tax
New York City may be known as the bagel capital of the world, but its inhabitants are subject to a "bagel tax" whenever they choose to buy a pre-sliced bagel with cream cheese.
Philadelphia Cream Cheese and H&H Bagels, a New York City-based bagel shop, created a new bagel in protest of an old law: one that is stuffed with cream cheese. Typically you’d slice a bagel in half and cover it with schmear. For a few days, H&H bagel buyers could purchase something more closely resembling a cream cheese donut. The goal of messing with one of New York City’s most sacred delicacies? The two companies wanted to draw attention to the so-called "bagel tax" in New York City.
The bagel tax referred to an 8.875% sales tax applied to prepared foods in New York City. Packaged food and unprepared items are usually exempt from this tax. Once the bagel is sliced and covered with cream cheese, the city considers it prepared food and subjects the seller to a tax. By stuffing the bagels with cream cheese after they are baked, H&H Bagels can avoid applying the tax because the bagel is never sliced and thus isn’t considered prepared food.
A tax on prepared food isn’t unique to New York City. The law was originally implemented during the Great Depression as a way to generate revenue while avoiding taxes on essential items like groceries. Several other states and municipalities also impose taxes on prepared foods, and a few states have even gone as far as taxing groceries. Most U.S. states have a sales tax, but only 13 states impose some type of tax on groceries. The rules and rates vary widely between these states. When groceries are taxed, they are often subject to a much lower rate, and tax credits may even offset some of the tax for low-income shoppers.
There are two broad types of taxes that governments can impose on markets, regardless of their intention behind implementing the tax. A tax on the physical unit being sold is known as an excise tax, while an ad valorem tax is levied as a percentage of the value of a product or service. New York’s bagel tax would be considered an ad valorem tax because the amount of tax owed is based on a percentage of the bagel’s final price. Bagel sellers are responsible for collecting and remitting the taxes to the government, but the actual burden of the tax likely falls on both buyers and sellers. When new taxes are imposed on products, sellers may need to lower the price they receive for their product a bit to account for a higher, final price that consumers will ultimately pay compared to if no taxes were imposed at all.
The relative size of that split is known as the tax burden and depends on the relative elasticity of demand and supply. Since we don’t know what prices would be like in the absence of a tax, it’s difficult to infer who is paying a larger share of the tax. The creation of the new stuffed bagel, however, does highlight one of the many creative ways that sellers attempt to avoid taxes altogether.
Tax evasion typically refers to the illegal or illicit activities that people engage in to avoid paying taxes. Tax avoidance, however, involves doing something to reduce your tax liability. The creation of the stuffed bagel is a form of legal tax avoidance. It’s a creative, and perfectly legal, way to offer a similar product at a lower price to their customers.
While tax avoidance can create fun new products, tax evasion can have serious consequences for the economy as a whole. When people avoid paying taxes, it reduces the revenue that governments have to spend on public goods and services like education, healthcare, and infrastructure. This, in turn, can lead to a decline in the quality of these goods and services, which can harm the overall economy.
A final concept to consider is associated with the original intent of the tax on prepared foods. Tax incentives refer to the tax breaks or subsidies that the government offers to encourage certain behaviors or activities. Taxing prepared foods is intended to incentivize people to cook their meals at home instead of eating out at restaurants. Despite that tax, the share of money spent on food cooked at home has been declining for decades, while the share of spending on food consumed outside of the home has increased.
Tax incentives can have both positive and negative effects on the economy. On the one hand, they can encourage desirable behaviors and may stimulate economic growth in a particular area. Tax incentives may encourage businesses to invest in new equipment, hire more workers, and expand their operations. On the other hand, tax incentives can also have unintended consequences and distort economic behavior. If you were hoping to snag a cream cheese stuffed bagel, you’re out of luck. The bagel was only available from April 14 through Tax Day, Tuesday, April 18.
In 2008, 1,979 people went to the emergency room due to a bagel-related injury [Wall Street Journal]
The world’s largest bagel weighed 868 pounds and was made by Brueggers Bagels [Guiness World Records]
There are an estimated 29,847 people employed at bagel stores in the United States [IBISWorld]
About 13% of all U.S. federal taxes go unpaid, even after compliance efforts are taken into account [Internal Revenue Service]
"When people avoid paying taxes, it reduces the revenue that governments have to spend on public goods and services like education, healthcare, and infrastructure. This, in turn, can lead to a decline in the quality of these goods and services, which can harm the overall economy."
I have yet to see any evidence that *increased* government spending on those has noticeably increased their quality.