The food-purchase subsidy belongs to people, not receipts

Food has a reduced VAT rate in Finland, justified by the needs of low-income people. Yet the reduced rate on food subsidises high earners more than low-income people. It is neither fair nor sensible to subsidise the grocery shopping of the well-off this way.

We propose turning the lower VAT rate on food into a small basic income, which would be fairer and more efficient and would increase people’s freedom. The change would also pay for itself.

What is this about?

Less VAT is paid on food than on other consumption, so the state gives up part of its tax revenue on every food purchase. In practice this is a form of state support: the reduced rate produces exactly the same result as if the state paid part of people’s grocery bill at the checkout. The reduced rate is a subsidy, just as many business subsidies are tax subsidies.

The problem with the reduced rate on food is that the well-off spend about 1.8 times as much money on groceries, so in practice the state mainly subsidises the well-off through this arrangement. This even though the lower rate is justified precisely by supporting low-income people.

We propose moving food to the standard VAT rate of 25.5 per cent and paying all of the revenue directly back to people as an equal monthly basic income. Neither half of the solution can be carried out on its own: we will not accept a higher VAT on food without introducing the basic income!

The food VAT subsidy goes mostly to high earners

In 2022 the financial benefit of the reduced VAT on food was on average €21 a month for the lowest earners and €37 a month for the highest earners. The highest earners therefore get about 75% more support for their grocery shopping than the lowest earners.

• Lowest-income 20%: groceries €2,848 a year, VAT paid at the food rate (14%) €350, VAT at the standard rate (24%) €600. Subsidy €250 a year, or about €21 a month.
• Highest-income 20%: groceries €5,034 a year, VAT paid at the food rate (14%) €618, VAT at the standard rate (24%) €1,060. Subsidy €442 a year, or about €37 a month.

How were the figures above calculated?

According to Statistics Finland’s Household Budget Survey, the lowest-income fifth of Finns spent about €2,848 per consumption unit on food and non-alcoholic beverages in 2022, and the highest-income fifth about €5,034. Removing the 14 per cent food VAT in force in 2022 and calculating how much tax would have been paid at the 24 per cent standard rate in force the same year gives the size of the subsidy: the lowest-income fifth received about €250 a year, the highest about €442. Per month that is about €21 for the lowest earners and €37 for the highest.

The figures are per consumption unit, a measure standardised for household size (first adult 1.0, other adults 0.5, children 0.3), not per person. This does not change the conclusion: because the measure is already standardised for household size, the comparison between the lowest- and highest-income fifths is fair regardless of how large or small the households in each group are.

Source: Statistics Finland, Household Budget Survey 2022, consumption expenditure per consumption unit (in Finnish). Tax rates for 2022: food VAT 14%, standard VAT 24%.

This is no surprise once you think about it for a moment. The subsidy is tied to the amount spent, not to the buyer’s income. The more money you spend on food, the more support you get, and high earners spend more on food than low-income people. A form of support meant to help low-income people has ended up subsidising high earners the most. The implementation is simply wrong.

The same shows on a single receipt, not just as a statistical average: the more expensive the purchase, the bigger the subsidy, whether or not the buyer needs support.

The support only works for groceries

The reduced rate is not only poorly targeted in terms of who receives the support. Another key problem is that the reduced rate directs the support only to buying food. A low-income person knows best what their money is best spent on at any given time. Often it is food, but sometimes the bigger need is rent, medicine, bus tickets or a child’s hobby fees. The reduced VAT on food offers no alternatives, because it is support tied to groceries with no flexibility.

We Market Greens do not want to be paternalistic towards low-income people. We do not believe the state knows better than people themselves what their euros are best spent on. That is why we want to change the form of the support to better match its underlying purpose.

Money straight to people

The solution is simple: food is moved to the standard VAT rate of 25.5 per cent, and all of the revenue is paid back to people as money, in other words as a small basic income. The basic income would be paid monthly and in the same amount to every child and adult, from CEOs to conscripts and from babies to pensioners. It would need no applications, no means-testing and no other separate bureaucracy.

We estimate that roughly €25 per person, children included (in Finnish), could land in people’s accounts each month. We estimate that, on average, the support would slightly improve what low-income people get compared with the reduced VAT rate, while clearly cutting the support high earners receive. In line with the Market Greens’ core values, the tax would also fall more clearly on consumption, since those who consume more would be subsidised relatively less than today.

The basic income model improves the position of low-income people on average, especially families with children, and would end today’s ethically untenable situation in which the state mainly subsidises the grocery shopping of high earners. The change also increases the freedom of low-income people: the money is not earmarked, so everyone decides for themselves whether to spend it on food, rent or something else. And because the support is paid automatically to every citizen, it needs no snooping or paternalistic bureaucracy. Freedom, not paternalism!

See also the Economy Greens’ presentation on the topic (in Finnish).

Without a basic income we will not accept a VAT increase

This is a deal-breaker for us: we will not accept raising VAT on food to the standard level unless the revenue is returned to people as a monthly income at the same time. No “we’ll look at it later”, no “we’ll compensate separately in some other context”: the monthly “food basic income” must take effect at exactly the same moment as the VAT on food is raised.

We will not compromise on this. It is the core of the whole proposal: we do not want to raise people’s taxes, but to change the form of the support. If the basic income does not happen, the whole proposal does not happen.

The proposal to replace the reduced VAT rate on food with a VAT refund belongs to the whole party and is in the Greens’ economic policy programme (in Finnish). Saara Hyrkkö has also presented the idea in Helsingin Sanomat.

What follows from this?

Moving food to the standard rate and returning the revenue as a monthly income would bring several benefits at once. The support would be better targeted: low-income people would be better off on average, and the support for high earners would shrink. People would be free to decide for themselves what to spend their own money on, without the state dictating. The tax system would become simpler as one special treatment disappears. And because this is in practice a small basic income, it would be the first concrete step towards a genuine basic income and towards freeing people from today’s Kafkaesque, snooping bureaucratic social security.

The reduced VAT on food is not a bad idea because low-income people should not be supported. It is a bad idea because it does that badly. A fairer, simpler and freer alternative is to pay the money straight to people.

Join us in demanding that the support goes where it was meant to go. Switch to a genuine market party!

Why is this proposal here too?

I am one of the authors of this proposal. The Market Greens are the Greens’ pro-market network that I founded – I am publishing the proposal on my own site as well, because the economy is one of the focus areas of my parliamentary campaign. The food basic income continues the line of our earlier proposal, your paycheck should build wealth: taxation should treat people fairly and leave the decisions to them. More Market Green posts are on the category page, and the original version of the proposal is on the Market Greens’ site in Finnish.