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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• Federal luxury tax repealed in 1993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
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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
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•
•
•
•
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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