Transcript Lecture 8 File

C h a p t e r 16
TAXES ON CONSUMPTION
AND SALES
COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo,
and South-Western are trademarks used herein under license.
16-1
Consumption as a Tax Base
• General tax on consumption equivalent to an income tax
that allows savings to be excluded from the tax bases
• Annual comprehensive consumption is annual
comprehensive income minus annual savings
• Comprehensive consumption tax, sometimes called an
expenditure tax, would work like an income tax that
allows exclusion of retirement savings from the tax base
– All savings, without limit, no matter for what purpose,
would be excluded from income
– No tax penalty for withdrawing funds from savings
– Tax paid only when funds are converted to cash and
spent
16-2
Consumption Versus Saving
• Can be argued that ability to pay more
appropriately measured by a person’s basic
capacity to earn income
– On basis of horizontal equity, two people with equal
potential to earn should pay same amount of taxes
over their lifetimes
• Would be taxed differently according to the way
they differ in tendencies to defer consumption
– One who saves nothing is taxed entirely on basis of
labor income; one who prefers to save pays taxes
both on labor earnings and income from accumulated
16-3
capital
Comprehensive Consumption Tax Base
• Comprehensive consumption tax base excludes
any change in net worth from the tax base
• Under consumption tax, measuring realized or
unrealized capital gains is unnecessary; would
not be taxed until converted to cash and spent
• Under consumption tax, inflation not a problem
as only current expenditures are taxed
• Anything that increases net worth of taxpayer
would be excluded from tax base
– Savings accounts at financial institutions, business
inventories, stocks and bonds
16-4
Incidence of Consumption Tax
•
Because capital income excluded from
taxation under consumption tax, tax would be
borne according to labor earnings
•
Portion borne by labor income could be shifted
to consumers if workers adjusted work hours in
response to tax
•
Consumption tax likely to be more regressive
with respect to income than income tax
–
Though tax rate structure could be modified to
achieve collectively chosen distribution of burden
16-5
Sales Taxes
•
Few sales taxes implemented to conform to
comprehensive consumption tax base
–
•
Many states exempt certain basic goods
regarded as necessities
–
•
Levied mostly on tangible goods, excluding things
like professional services, haircuts, transportation,
etc.
Food, grocery items, prescription drugs
Many consumption taxes levied on purchase
of capital goods
–
Automobiles, consumer durables
16-6
Retail Sales Tax
•
•
•
•
Ad valorem levy of fixed percentage on dollar
value of retail purchases made by consumers
Levied on consumption at its final stage,
collected from businesses that make retail
sales
Usually added to retail price of goods and
services
Broadening sales tax base can increase
revenue
16-7
Issues in Sales Taxation
• Services initially exempt from taxation for
administrative reasons
• As services command more and more of
consumption, states in financial crisis forced to
consider taxing services
• Aging population can adversely affect states’
sales tax revenue while services exempt
– As percentage of population over 65 increases,
consumption more weighted to services,
pharmaceuticals, etc., now exempt
• Most states do not tax purchases by government
agencies and nonprofits
• E-commerce presents challenges in state sales
taxation
16-8
Excise Taxes
• Selective taxes levied on certain types of
consumption activities
• Distort choices among goods and services,
result in efficiency losses to economy
• Some designed to raise revenue, others
intended to discourage particular consumption
activities
– Excise taxes on tires are to raise revenue; excise
taxes on liquor largely to discourage consumption
• Many consumption activities taxed are alleged to
generate negative externalities or are
considered luxury goods and services
16-9
Incidence of Sales, Excise Taxes
•
Argued that they are regressive with respect to
income
–
Annual consumption expenditures, as percentage of
annual income, higher for low-income taxpayers
than high-income taxpayers
•
This has led many states to exempt certain
items, such as food
•
Distribution of tax burden between buyers and
sellers varies from state to state, ranges from
28% to 89% of burden borne by buyers
16-10
Turnover Taxes
•
Multistage sales taxes levied at some fixed
rate on transactions at all levels of production
–
•
Extremely productive levy, producing high,
stable yields at low rates
–
•
Effective tax rate conditioned by number of stages
of production
Low rate believed to discourage tax evasion
Studies have shown it to be somewhat
progressive
–
Effective rates on many food items lower than those
on clothing and other manufactured goods
16-11
Value-Added Tax (VAT)
•
•
General tax on consumption levied on the
value added to intermediate products by
businesses at each stage of production
Value added is difference between sales
proceeds and purchases of intermediate goods
and services over a certain period
Value Added = Total Transactions – Intermediate Transactions
= Final Sales = GDP
= Wages + Interest + Profiles + Rents + Depreciation
•
•
•
Very popular in Europe
Not currently used by U.S. federal government
General tax on value added equivalent to tax16-12
on national product
Administration of VAT
• VAT typically rebated on export sales
– Goods of nations that use the tax more competitive in
international markets when they are exported to
nations where there is no national sales tax
• Imported products subject to VAT, increasing
prices to domestic consumers
• A criticism of VAT is that costs of administration
and compliance high compared to other taxes
– Estimated that administrative and compliance costs
for new VAT in U.S. could be $8 billion per year
16-13
Direct vs. Indirect taxes
16-14