Econ 132 Public Finance, Foldvary
Holcombe, 12, Taxes on transactions, pp. 243+
An excise tax is either placed on the sale of goods or on a privilege.
A general sales tax is applied to a broad range of goods.
Excise taxes can be unit or ad valorem.
Unit: per unit of quantity, such as a gallon of gasoline, or per minute of telephone call.
The shifting up of ad valorem taxes increases with quantity (p. 244);
a percentage or proportion higher than the pre-tax supply curve.
Ad valorem taxes are not reduced by inflation.
But unit taxes could be indexed to inflation.
But the price could also change due to changes in costs.
Sellers have an incentive to minimize the tax cost.
E.g. a tax per gallon of wine favors the more expensive wines.
State-level excise taxes mostly on gasoline and on
disapproved goods such as alcohol and tobacco.
The U.S. federal government has levied excise taxes since the adoption of the Constitution.
Federal excise taxes are included in the price of goods and not noticed by most buyers.
4 percent of federal revenues.
Examples: tires, gasoline and other fuels, alcohol, tobacco, and airline tickets.
There is a federal excise tax of 7.5 percent of the airline ticket, plus fees.
Airline passengers pay the federal government $3.20 for every flight, called a "segment fee."
Passengers also pay a federal security fee of $2.50 for every flight, up to $10 for a round-trip.
Airports charge per-passenger fees up to $4.50 per boarding to pay for terminals and runways.
There is a combined average of 47 percent federal/state/local taxes on the average pack of
cigarettes, and 55 percent in combined taxes on a 750 ml bottle of liquor, and an average 38.37
percent in combined taxes on a gallon of gasoline!
The Current Federal Cigarette Tax Rate is 39c per pack. California's tax per pack is 87c.
The Federal excise tax on beer amounts to about a nickel per drink, a bit less than seven percent
of the average price of a six-pack. California adds 20c per gallon. Plus sales tax.
Over 40 percent of the cost of a bottle of beer is for taxes, including excise taxes.
The largest federal taxes on goods are on fuel.
There is a 18.4 cents-a-gallon federal gasoline tax, and an 18 cent California tax.
p. 247: User charges
Voluntary charges are called user fees.
Based on the benefit principle.
Efficient and equitable.
Tolls, parking meters, passports.
Government-owned utilities charge users.
Transit charges are fees.
But some excise taxes are called “user fees.”
Gasoline taxes are not really user charges.
“Fees” for permits not voluntary.
Automobile registration - a tax.
Garbage collection a fee if there are private alternatives,
or if one pays per garbage.
Charges for natural monopolies are fees.
No excess burden if a fee = MC.
The other costs can be efficiently paid for from rent.
Pay TV: charge zero?
Another MC is the cost of one more show.
A provider could use demand revelation.
Or charge the price that maximizes profit.
An incentive to produce shows.
Gasoline tax may be a proxy for a road use tax,
but a blunt one. Not really a user fee.
First class postage is a user charge,
but also includes subsidy and surcharge.
Benefit of simplicity.
Taxes on foreign trade
Export taxes are prohibited by the Constitution
"Duties" are taxes on goods, including tariffs.
Import taxes are excise taxes on imports.
For revenue and for protection from competition.
Tariffs were a major federal source of revenue until 1913.
The Smoot-Hawley tariff of 1930, was supported by president Hoover.
It raised tariffs from 20% to 35% of the price of imports.
Other countries did the same.
In this case, the result could be predicted.
International trade collapsed. Farmers were especially hurt
Since WWII, a global movement to reduce tariffs.
Now only 1 percent of federal revenue.
Tariff for protection does not save jobs.
Sugar jobs offset by loss of candy jobs.
Quotas have the same effect as tariffs in reducing imports,
but provide no revenue to government.
General sales taxes
1/3 of state revenues.
Taxes most goods but not services - basic food is exempt.
Real estate is exempt.
Intermediate goods such as books in wholesale are not taxed.
The incidence of the sales tax is mostly on consumption,
although the tax also imposes on capital goods.
The tax shifts purchases to untaxed items, and shifts towards leisure.
Sales taxes are regressive, although food and rent are not taxed in California.
Using a lifetime perspective,
if all consumption were taxed, and there is no bequest,
sales taxes would be equivalent to income taxes.
California has a base sales tax of 7.50%, and can total up to 10.00% with local sales tax included
Goods imported to California are legally subject to taxes - a use tax.
Sellers outside the state are not required to collect CA sales tax
if they do not have a physical presence in the state.
Sales tax is required on all purchases of tangible personal property to its ultimate consumer. Liability for sales tax attaches to the seller, not the buyer;
but the seller is allowed to collect the tax from the buyer if the buyer agrees.
A complete turnover tax taxes all transactions, including intermediate goods (p. 261).
That multiplies the taxes on intermediate goods.
The sales tax is a retail turnover tax.
It taxes all retail sales transactions, including barter.
Used cars are taxed, even though the buyer of the new car paid a tax.
Coins get taxed each time they are sold.
History of national sales taxes is not promising for its advocates.
France had high sales taxes before its revolution.
The Confederate States of America was financed by a tax on farm output.
Russia before its revolution financed its army in WWI with a sales tax.
In 1932 president Hoover proposed a national sales tax. He lost the election.
In India, Gandhi protested a sales tax on salt. Britain lost India.
In the 1960s South Vietnam put in a high sales tax. The lost the war to the Communists.
Now in the US some conservatives are pushing for a national sales tax.
Rate would be 35% or higher.
High sales taxes induce evasion.
Would have a generational incidence, a tax on the wealth of the retired.
The lesson of history: the national sales tax is for losers.
5 US states have no sales tax: Alaska, Oregon, New Hampshire, Delaware, Montana
No US state had a sales tax until 1929.
California sales tax enacted in 1933. Started at 2%.
The Riley-Steward constitutional amendment.
CA sales tax is administered by the State Board of Equalization.
Now CA sales tax is 7.25% plus county add-ons.
Cities and counties have extra sales taxes.
7000 sales tax jurisdictions in the USA.
Catalog and Internet sales not taxed unless the company has a presence in the state.
There is a push for sales taxes on mail order.
CA sales tax is 1.2% of assessed real estate value.
Could be replaced with an extra 1.2% of real estate tax.
Some states are attempting to coordinate their sales taxes.
The Streamlined Sales Tax Project would require sellers in those states to levy the tax.
California is an “advisory” state, part of the project but not conforming to its standards.
Congress has the power under the Commerce Clause to enable the states to collect taxes for goods brought in..
Bills were introduced in Congress in Feb. 2013 to enable the states to tax goods f/ out of state.
California has started taxing sales from Amazon.com
P. 259: Income and substitution effects
Human time divided between labor and leisure.
An income tax reduces the net wage, and so does the sales tax.
The substitution effect of a wage tax is to shift time from labor to leisure.
A tax on wages, whether on income or spending, reduces the opportunity cost of leisure.
There is less consumption of taxed goods and more consumption of untaxed leisure.
The income effect has the opposite effect.
To save a particular amount, one has to work more hours when labor is taxed.
With less income, one consumes less in general, including less leisure.
The income effect is significant with a very large tax.
An income tax penalizes savings;
a sales tax penalizes borrowing.
Shift from income to national sales tax?
P. 261: Can leisure be taxed?
The economic meaning of leisure is time not spent engaged in labor.
It does not mean particular activities or goods.
How could leisure time be taxed?
Time can be taxed. You can’t hide it.
Like land, time does not flee or shrink.
There is no substitution between labor and leisure if all time is taxed.
In effect, a tax on time is lump sum.
Some of the American colonies before the revolution had “faculty” tax
on the capacity to obtain income.
Faculty taxes were levied on the faculty or earning capacity of persons following certain trades or having certain skills.
A Massachusetts Bay law of 1634 provided for the assessment of every man’s assets and the product of his abilities.
In 1643, assessors were appointed to rate inhabitants on their estates and their faculties, which included personal abilities.
Further definition three years later specified the taxation of “laborers, artificers, and handicraftsmen” on their “returns and gains.”
A fixed rate was applied to the estimated earnings (i.e. wages, profits, and other income) of all members of a particular profession.
Connecticut, Massachusetts, and South Carolina derived significant revenues from its use.
The tax recognized that compensations received outside of property holdings also represented
p. 261: The value added tax, VAT
A tax on the value added by each producer.
Value added in each stage: sales price minus cost of inputs.
European countries have it, also Canada, China.
The total VAT equals a sales tax on the final good.
As practiced, there are various VAT rates and exemptions.
Banking services exempt.
Advantage: exports are tax-free.
p. 265: Imports are charged a tax equal to their full value
in order to place the same VAT rate on imports as on domestic goods.
Income taxes not subtracted from US exports.
Services of owner-occupied housing exempt.
Current income tax already much like a consumption tax,
as IRAs etc. exempt interest income and business has accelerated depreciation.