Public Finance, Foldvary
Anderson, 16, Sales and excise taxes
Direct taxes: capitations (head taxes regardless of property or transactions) and taxes on property.
Indirect taxes: Taxes that are not direct.
Taxes are indirect if the funds are not directly paid to the government by a person taxed.
Taxes are indirect if the tax is on a privilege, circumstance, event, condition, or activity,
and indirectly on the benefit from it.
Internal Revenue Code section 5000A, by the Patient Protection and Affordable Care Act (Public Law 111–148), imposes an indirect tax on the condition of not having medical insurance.
VAT is an indirect tax.
The word excise is derived from the Dutch accijns, from the Latin accensare, meaning "to tax".
The Supreme Court has ruled that the personal income tax is an excise tax.
The US income tax of 1862 was based on the power to lay an excise tax.
The Civil War income tax of 3% was based on privileged income over $600.
Getting money from the government is a privilege.
Rich people were presumed to be gaining from governmental favors.
The tax was self-assessed.
The payer signed a statement: I hereby certify that the following is a true statement of my gains in 1862, subject to an income tax under the excise laws of the United States.
The U.S. Constitution, Article I, Sec. 8, Clause 1, empowers Congress to lay excises.
US excise taxes on goods, 3% of revenues.
the U.S.A. is the only major nation lacking a national-level sales tax (or VAT or GST).
The Commerce Clause of the U.S. Constitution did for the new U.S.A. what Turgot
had tried to do for France, it guaranteed free trade among the states.
Until 1933, domestic free trade also prevented states from using sales taxes to raise revenue,
for fear of interstate competition.
It still tends to cap state sales tax rates.
That forced states back on the property tax, just as Turgot recommended for France.
Without it, it is likely that state sales taxes would rise to 20% or more in short order, as the wholesome fear of interstate competition was stifled.
Because of that, the USA raises a higher fraction of combined national, state and local revenues from taxes on property, and income from property, and from bequests of property.
Any income tax, personal or corporate, is less depressive, and has less excess burden, than any sales or excise tax or VAT, however “general.”
That is partly because labor costs are deductible from taxable income.
Deducting capital outlays may lower the effective income tax rate on investing in
new capital goods, often to zero and even below.
Loopholes, like fast writeoff and expensing of investing in creating new capital goods – genuinely “income-creating” spending – are exactly what have made high rates of income taxation tolerable, and compatible with high rates of investing during the mid-20th Century.
John Stuart Mill in 1848, citing an even earlier finding by John McCullough, showed that a
seemingly “general” sales tax would tax capital for turning over, and thus induce investors to
favor kinds of capital goods that turn over slowly.
In Austrian terms, the tax induces investors to lengthen the Austrian “period of production,” and thus distort the “structure of capital” in favor of “higher order” capital goods.
In Austrian cycle theory, this is a cardinal sin of public policy.
Austrian writers blame the problem entirely on low interest rates enabled by misguided central bankers. Something is missing there, and that something is tax policy.
Here is Mill’s proto-Austrian case against a general sales tax:
“… if there were a tax on all commodities, exactly proportioned to their value, there would, ….. as Mr. M’Culloch has pointed out, be a ‘disturbance’ of values,… owing to … the different durability of the capital employed in different occupations. … in two different occupations … if a greater proportion of one than of the other is fixed capital, or if that fixed capital is more durable, there will be a less consumption of capital in the year, and less will be required to replace it, so that the profit, if absolutely the same, will form a greater proportion of the annual returns.
To derive from a capital of £1,000 a profit of £100, the one producer may have to sell produce to the value of £1,100, the other only to the value of £500. [I.e., where capital is less
durable, you must sell more gross to get the same net profit.]
“If on these two branches of industry a tax be imposed … the one commodity must rise in price, or the other must fall, or both: commodities made chiefly by immediate labor must rise in value, as compared with those which are chiefly made by machinery…”
How memorable is Mill’s word “disturbance,” 150 years before Darth Vader in Star Wars
sensed a “Disturbance in The Force.”
P. 518: Which tax has been responsible for revolts, revolutions, and political suicides?
The excise tax. A subset of indirect taxes.
Princeton: A tax measured by the amount of business.
Anderson: taxes on the exchange of specific goods.
IRS: One type is a penalty tax applied to ineligible transactions in retirement accounts.
Wikipedia: Excise taxes are inland taxes, thus excludes tariffs.
An excise tax is either placed on the sale of particular goods or on a privilege.
A sales tax applies broadly to a large set of goods.
Those on products with social disapproval are called “sin taxes” or sumptuary taxes.
Justifications: disapproval, reduction, compensation for medical costs
Politically easy to tax tobacco
Sales taxes have caused resentment, revolts, rebellions and political defeats.
Was historically applied to commodities such as salt, tea, whiskey.
Retail sales taxes, however “general” or universal in their apparent coverage, tax capital for
Turnover is measured by the sales/capital ratio, which is highly variable among
different firms, products, locations, stages of the cycle - and tax regimes, which economists
Sales taxes depress it heavily.
Turnover means replacement; and replacement sustains demand for labor.
Replacement does not just depend on sales, it anticipates them, and thereby generates the consumer incomes that finance them:
turnover is the autonomous variable that takes the lead in the otherwise circular and now vicious
circle of macro-economics in which employers wait for consumers, while consumers wait for
employers to hire them.
Turnover is measured by the sales/capital ratio, which is highly variable among different firms, products, locations, stages of the cycle - and tax regimes, which economists influence.
By taxing turnover, sales taxes shrink their own base.
In the lingo of public finance, they are contingent on “taxable events.”
Sales taxes go back to ancient history.
China imposed a tax on salt in 2200 BCE in China under emperor Hsia Yu.
America, George III, 1776-83, lost the colonies that became the U.S.A.
France. Louis XVI, 1789-93, and Queen Marie Antoinette, guillotined
1790s: Whiskey tax of 30c per gallon.
P. 519: US: Whiskey rebellion of 1794.
President Washington sent soldiers to stop it.
US tax on carriages in the 1790s.
Declared an indirect tax in the Hylton case of 1796.
Hylton v. United States, 3 U.S. 171 (1796), was an early United States Supreme Court case in which the Court held that a tax on carriages did not violate the Article I, Section 2, Clause 3 respectively the Article I, Clause 9 requirement for the apportioning of direct taxes.
It found the carriage tax was an "excise" instead of a "direct tax" requiring apportionment among the states by population.
The Court noted that a tax on land was an example of a direct tax contemplated by the Constitution.
It is also significant for being the first case heard by the U.S. Supreme Court challenging the constitutionality of an act of Congress;
in choosing to uphold the tax, the Court exercised judicial review,
The Hylton case was cited in defense of the income tax and the ACA individual mandate.
The Confederate states, even though fighting to survive, stood on their states’ rights against
their own C.S.A. government, and bucked an attempted C.S.A. property tax.
Jefferson Davis had to finance secession with excise taxes.
Davis put a 10% tax on all farm production, paid in kind — a crushing burden on marginal farmers.
The C.S.A. repudiated its bonds and currency, and lost the war catastrophically.
Following attempted Reconstruction, however, came Hayes, Reunion and Restoration of the old ruling class which ever since, first as Democrats and now as Republicans, has saddled the old Confederate States with the most regressive tax systems in the nation,
featuring heavy reliance on sales taxes.
Russia. Nicholas II, 1914-17, loses war he cannot finance from excise taxes. 1919, shot, with his entire family, and his Romanov dynasty terminated
India, 1930, Gandhi leads march to the sea in India, protesting British salt tax. 1947, Brits finally pull out. They had beaten Germany, Italy and Japan, but lost to unarmed Indians, led by a pacifist, protesting a sales tax on salt.
Viet Nam. 1960-65, government of South Viet Nam doubled sales tax from 10% to 20%, under prodding from U.S. "experts." Ruined nation's commerce, while big landowners were untaxed. Viet Cong lined up against them, won peasant support
Now some American conservatives want to switch from an income tax to a national sales tax.
They don’t understand economics or history.
The lesson: sales taxes are for losers.
There is already much sales tax evasion.
Buying and shipping and re-shipping of gems.
Sales taxes can be unit or ad valorem.
Ad valorem taxes are not reduced by inflation.
But unit taxes could be indexed to inflation.
Sales taxes usually apply to final goods.
A book seller is exempt when he buys from the wholeseller.
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.
Some go to general revenue, others earmarked.
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.
User charges - voluntary and excise taxes called user fees.
No excess burden if a fee = MC.
Gasoline taxes are not really user charges.
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. Taxes consumption.
1/3 of state revenues.
Not so general - basic food is exempt, services not taxed.
The tax shifts purchases to untaxed items, and shifts towards leisure.
Sales taxes are regressive. Less so when food is not taxed.
Using a lifetime perspective,
if all consumption were taxed, and there is no bequest,
sales taxes would be equivalent to income taxes.
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 or “nexus” in the state.
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.
But what that means is unclear.
Problem with taxing downloads.
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.
In Europe, legislation was evidently recently passed which covers digitally-downloaded software, and makes any such download taxable in the location that it's downloaded *to*, and subject to VAT (Value Added Tax), even if the software is being provided by a non-European company -- Non-EU companies will be required to register (with any European country of their choice), in order to figure out how to get the VAT collected
Some states are attempting to coordinate their sales taxes.
The Streamlined Sales Tax Project would require sellers in those states to levy the tax.
P. 261: Can leisure be taxed?
Time can be taxed. You can’t hide it.
Like land, time does not flee or shrink.
A coin gets taxed each time it is sold.
It discourages transactions and promotes vertical integration.
The value added tax, VAT
In 1954 the tide had started to turn back toward the attitudes of l’ancien régime
with its taxes on producers, merchants and buyers.
Maurice Lauré, an engineer turned tax-man, got France to adopt VAT “to meet a fiscal crisis” (although such spin accompanies most political moves).
VAT had political and administrative attractions, but economically speaking is only a
variant form of sales tax.
France introduced the first national VAT in 1954 (the same year it lost at Dien Bien Phu).
It was not general, but destined to become so.
President René Coty, not otherwise a name to remember, was the last President of the fractionated 4th Republic, but Lauré’s VAT was declared a success.
VAT quickly metastasized around Europe.
The EC required member states to adopt VAT to enter the EU.
Latin America also went along.
In a second push around 1990, some industrial states like Canada, Australia, Switzerland and Japan came on board too, along with many “developing” economies in Africa and Asia, until today some 140 nations use VAT.
They were pushed along by newly empowered international organizations like OECD and the IMF and the World Bank.
A tax on the value added by each producer.
The total VAT equals a sales tax on the final good.
Sales taxes are easier to collect and measure.
Investment goods complicate VAT.
But there is less evasion with VAT.
A land-value tax is in a way a value-added tax,
based on the land value added by civic services.
A product is produced in stages.
Value added in each stage: sales price minus cost of inputs.
Seller pays tax. Included in price of good. More expensive.
VAT applied to a percentage of the value added.
Used in Europe. Standardized for European Union.
Treatment of investments:
Like consumption: full value subtracted in year.
Europe: food taxed lower rate.
Banking services exempt.
Services of owner-occupied housing exempt.
VAT can be rebated on exports. Allowed by GATT.
Income taxes not subtracted from US exports.
VAT rates have increased where used.
Imports are taxed equal to their full value.
Europe generally uses the “consumption-type VAT,” meaning that capital outlays are
expensible. This may have the effect of exempting the income of capital from the tax, although it
is hard to find a comprehensible definition of “capital,”
and if it includes land it is extremely discriminatory,
and in any case favors more durable over less durable capital,
and fixed over circulating capital.
Consumption tax different from sales tax.
Paid per person rather than per commodity.
Can thus adjust the tax for personal circumstances.
Consumption taxes based on current year, avoiding inflation problem.
Consumption and income taxes both distort.
One is not clearly more efficient than the other.
Both based on "ability to pay" rather than benefits.
Current income tax already much like a consumption tax,
as IRAs etc. exempt interest income and business has acceleated depreciation.
Problem in taxing commodities, distinguishing investment versus consumption.
Defining consumption. Employee fringe benefits. Home production.
Politics would put in special rates, exemptions.
In September, 2012, the unemployment rate was 10.4% in the Euro area, and 23.3% for
youths aged 15-25 Patterns diverge across nations, with the highest youth unemployment rates in
Greece (55.6% in July), Spain (54.2%), Ireland (34.5%), Italy (35.1%) and Portugal (35.1%).
Those are catastrophic numbers. Even in France, a pillar of European Union where VAT got
started, the rate is 27.9%. Sturdy lowland and Baltic nations are not immune: rates in Belgium
are 18.0%, Denmark 14.2%, Finland 18.9%, Luxembourg 18.6%, Sweden 23.4%. Central
European Hungary, Poland, and the Czech Republic have high rates, too.