Economics Dictionary of ArgumentsHome
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| Sales tax: Sales tax in economics is a consumption tax levied on the sale of goods and services. Typically paid by the consumer at the point of purchase, it is collected by the retailer and remitted to the government. Sales tax rates can vary by region, and it is often used as a primary source of state or local government revenue. See also Taxation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Sales Tax - Dictionary of Arguments
Rothbard III 930 Sales tax/Rothbard: The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply "pass on" the 20-percent increase in all prices to consumers. Prices: In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Factors of production/goods: Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise? Moreover, if we look at the general array of prices, as is proper when dealing with a general sales tax, these are determined by the supply of and the demand for money, from the goods and money sides. For the general array of prices to rise, there must be either an increase in the supply of money, a decrease in the demand schedule for money, or both. Nothing in a general sales tax causes a change in either of these determinants. Long-run effects/VsSales tax: Furthermore, the long-run effects of a general sales tax on prices will be smaller than in the case of an equivalent partial excise tax. >Excise tax/Rothbard. Excise tax: A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources.(1) >Tax Shifting/Rothbard, >Taxation/Rothbard, >Income tax/Rothbard, >Cost Principle/Rothbard, >Neutral taxation/Economic theories, >Neutral taxation/Rothbard, >Service/Rothbard, >Bureaucracy/Rothbard, >Benefit principle/Rothbard, >Progressive tax/Rothbard. Rothbard III 931 Prices: In considering the general sales tax, many people are misled by the fact that the price paid by the consumer necessarily includes the tax. (…) [the consumer] tends to conclude that the tax has simply been added on to the "price.". Revenue: The revenue to the firm has, in effect, been reduced to allow for payment of taxes. This is precisely the consequence of a general sales tax. Its immediate impact Iowers the gross revenue of firms by the amount of the tax. Long run effects: In the long run, of course, firms cannot pay the tax, the loss in gross revenue of firms being imputed backward to interest income by capitalists and to wages and rents earned by owners of original factors - labor and ground land. >Factors of production/Rothbard. Backward shifting: A decrease in gross revenue to retail firms is reflected back to a decreased demand for the products of all the higher-order firms. The major result of a general sales tax is a general reduction in the net revenues accruing to original factors. The sales tax has been shifted backwards to original factor returns - to interest and to all wages and ground rents. No longer does every original factor of production earn its discounted marginal product. Discounted marginal value product (DMVP): Original factors now earn less than their DMVPs, the reduction consisting of the sales tax paid to the government. Rothbard III 933 Effect on consumption: (…) the general sales tax is a conspicuous example of failure to tax consumption. The sales tax is commonly supposed to penalize consumption, rather than income or capital. Yet we find that the sales tax reduces, not just consumption, but the incomes of original factors. The general sales tax is therefore an income tax, albeit a rather haphazard one. Politics: a) Many "right-wing" economists have advocated general sales taxation, as opposed to income taxation, on the grounds that the former taxes consumption but not savings-investment; b) many "left-wing" economists have opposed sales taxation for the same reason. RothbardVs: Both are mistaken; the sales tax is an income tax, though of a more haphazard and uncertain incidence. The major effect of the general sales tax will be that of the income tax - to reduce the consumption and the saving-invest- ment of the taxpayers.(2) Investments: In fact, since (…) the income tax by its nature falls more heavily on savings-investment than on consumption, we reach the paradoxical and important conclusion that a tax on consumption will fall more heavily on savings-investment than on consumption in its ultimate incidence. 1. Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since (…) a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby Iower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of "shifting." See the pioneering article by Harry Gunnison Brown, "The Incidence of a General Output or a General Sales Tax," reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, 111.: Richard D. Irwin, 1959), pp. 330—39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article. 2. Mr. Frank Chodorov, in his The Income Tax - Root of All Evil (New York: Devin-Adair, 1954), fails to indicate what other type of tax would be "better" from a free-market point ofview, than the income tax. It is clear from our discussion that there are few taxes indeed that will not be as bad as the income tax from the viewpoint of the free market. Certainly sales or excise taxation will not fill the bill. Mr. Chodorov, furthermore, is surely wrong when he terms income and inheritance taxes unique denials of the right of individual property. Any tax whatever infringes on property right, and there is nothing in an "indirect tax" which makes the infringement any less clear. It is true that an income tax forces the subject to keep records and disclose his personal dealings, thus imposing a further loss in his utility. The sales tax, however, also forces record-keeping; the difference again is one of degree rather than of kind, since here the directness covers only retail storekeepers instead of the bulk of the population._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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