Major Tax Structures:Taxes on Goods & Services

Troy University

PA6650- Governmental Budgeting

Chapter 9

Review

• Three Predominant Tax Bases

– INCOME

– Spending on GOODS & SERVICES

– PROPERTY

Overview

• Governments collected $454B from goods and services taxes in 2004

• Federal excises and customs at $90B

• Social Security collected $364.4B

Desirable Features• They provide considerable public revenue

• They extract money from people with economic capacity

• They can be patterned to collect for social costs and charges

• They tax what people take from the economy but donot prevent or inhibit investment and savings

Structural Distinctions• General or selective

– general is all transactions (general sales tax)– Specific is for certain products (motor fuel excise tax)

• Specific or ad valorem– Specific is for each unit ($500 per Ferrari)– Ad Valorem is percentage (10% lodging tax)

• Multistage or single stage

• General fund or earmarked

Table 9-1 page 374 / Table 9-2 page 375

The Equity Question

• Vertical equity– Regressive…poorer households have a

higher effective tax rate

• Horizontal equity– Discriminates against people with certain

preferences (smokers, imports, alcohol, drivers, luxury consumers)

Selective Excise Taxation

• Types of excise taxes– Luxury excise (yachts, furs, aircraft, autos)– Sumptuary excise (“sin” taxes on alcohol,

tobacco)– Benefit-base excise (motor fuel taxes for

roads)– Environmental excise (freon, coal, tires)– Other excise (custom duties, lodging tax)

Luxury Tax

• Federal luxury tax repealed in 1993

• Problems– Distorts producer and consumer choices– Taxes people on their preferences– Administrative problems

• Soft drinks, designer clothing• Inter-state rivalries

Sumptuary Excise

• Discourages excess consumption

• Pays for social costs

• “Sin Tax” (tobacco, alcohol, gambling)

• Disadvantages– Demand is price inelastic– Regressive (burden heavier on lower income)– Discriminates against low-priced brands

Benefit-Base Excise

• Fuel taxes help pay for highways– Should fuel prices pay for mass transit?

• Need to have a strong connection, which is often rare

• Price fluctuation based on demand of product

Regulatory and Environmental Excises

• Taxing of pollutants

• Gas guzzler tax

• Double dividend– Pays for bad effects of product– Makes cheaper green products more desirable

Other Excises

• Custom duties

• Imports– more expensive, less attractive

• Hotel/restaurant/entertainment taxes– tourism

General Taxes on Goods and Services

• Retail Sales Tax (RST)– America– Single stage

• Value Added Tax (VAT)– Most industrialized countries– Multi-stage

Retail Sales Tax

• Tax goes to government directly (no pyramid)• Ad valorem (percentage-based, 2.9 to 7%)• Piggy-backed - local governments cooperate• Vendor collects it

• Exclusion of producer’s goods– Businesses don’t pay for component parts or physical

ingredients– Businesses don’t pay for items used to produce the

product

• Services also taxed

Retail Sales Tax

• Commodity Exemptions– Food for at-home consumption– Prescription drugs– Clothing– Done to prevent regressivity– Some states use end-of-year tax rebate on

state income tax in lieu of exemptions

• Lots of variation from state to state

Retail Sales Tax

• Use taxes– Storage, use, or consumption of tangible

property– “car tax”– Taxation of interstate commerce by states is

forbidden– Internet transactions are free– Vendors act as “tax collectors”– Fairness to storefront operators– Sometimes taxed at origin, sometimes at

destination

Value-Added Taxes

• Tax applied at each stage of production• Over 75 countries use it – great revenue• Multistage, tax collected at each step• Relies on receipts and reimbursements• Difficult for tax evaders…paper trail• Nations remove the VAT for exports to stay

competitive

• Example on page 402• Worldwide rates on page 405

Conclusion

• Sales taxes are at the heart of state revenue systems, but relatively unimportant to the federal level

• Reasonably fair…you buy more, you pay more

• Some regressivity, some economic effects and behavior issues