Sales and Excise Taxes Anderson: Sales and Excise Taxes

Sales and Excise TaxesAnderson: Sales and Excise Taxes

2Copyright © by Houghton Mifflin Company. All rights reserved.

Introduction

• In this chapter we consider:

• General sales taxes applied to all final goods and services.

• Excise taxes applied to specific goods.



Excise Taxes

• History of excise taxes in the U.S.

• Efficiency aspects of excise taxes

• Equity Aspects of excise taxes

• Excess burden

• Federal excise taxes

• State excise taxes


History of Excise Taxes in the U.S.

• Excises have frequently been associated with war time.• After adoption of constitution—a long and elaborate list of excises

was adopted.• Taxed goods included carriages, liquor, snuff, and items purchased at

auction. • Public reaction against these taxes hitting the poor disproportionately

lead to the Whiskey Rebellion in 1794.


History of Excise Taxes in the U.S., [continued]

• Jefferson administration abolished all federal excises in 1802, except for tax on salt.• During the War of 1812 federal excises were revived.

• During the Civil War taxes were placed on liquor and

tobacco products.• They have remained in place to this day.



• First World War brought additional taxes on occupations, theatre admissions, telephone calls, jewelry, toilet preparations, and luggage.

• After the war, taxes on tobacco and stamp taxes on legal documents were retained as the major federal excise taxes.

• Liquor taxes remained in place through the Prohibition era.



• During the Depression, federal excises were placed on automobiles, trucks, buses, appliances, and other consumer durables.

• Those taxes were eliminated in the reforms of 1965.

• New taxes on wagering and diesel fuel were added during the Korean War.



• In the post Second World War era, federal excises have tended to be earmarked for specific purposes.

• In 1956, for example, the Federal Highway Trust Fund was established with federal excises on gasoline, diesel fuel, oil, and tires dedicated to the fund.

• In 1970 a similar innovation funded the Airport and Airway Trust Fund with taxes on passenger tickets, air freight, gasoline, tires, and tubes used in aviation.



• Again, in 1980, a similar funding mechanism was introduced with the Hazardous Substances Superfund to clean up chemical pollution.

• Taxes on crude oil and an array of forty-two hazardous waste-creating chemicals were implemented.



• After the Korean War, a long process of reducing and eliminating federal excise taxes began.

• The result is a relatively limited set of federal excises, generating a small amount of revenue.

• Federal excises account for less than 4% of total receipts currently.


Efficiency Aspects of Excise Taxes

• Since excises are applied to goods with relatively inelastic demand, the excess burden of excises taxes is relatively small.

• These are relatively efficient taxes.


Equity Aspects of Excise Taxes, [continued]

• Incidence of excise taxes.

• Since excises are applied to goods with relatively inelastic demand, the burden of the tax falls primarily on the consumers.

• See Figure 1.

• See Table 1 on the distribution of expenditures on tobacco, alcoholic beverages, and motor fuels.


Figure 15.1: A Unit Excise Tax Applied to a Good with Relatively Price-Inelastic Demand


Federal Excise Taxes

• General excise taxes

• Dedicated excise taxes



State Excise Taxes

• Gasoline excise taxes

• Cigarette excise taxes

• Alcoholic beverages excise taxes




Sales Taxes• Tax base• Tax rates• Administration of sales taxes• Origin or destination tax?• Nexus• Taxing electronic commerce• Smuggling and border effects• Use taxes


Tax Base

• Sales taxes are typically applied to final goods sold in the jurisdiction.

• Intermediate goods should not be taxed in order to avoid cascading.

• Question of taxing services is becoming increasingly important.


Administration of Sales Taxes

• The sales tax is typically applied to the seller of products, not the buyers, in order to make collection easier and more effective.

• Other administrative issues arise.


Origin or Destination Tax?

• A origin-based tax applies to all goods originating from the jurisdiction.

• Under an origin-based tax imports are not taxed while exports are taxed.

• A destination-based tax applied to all goods destined for the jurisdiction.

• Under an destination-based tax imports are taxed and exports are not taxed.


Nexus

• Nexus involves the legal test for presence in the jurisdiction, resulting the the obligation to pay the sales tax.

• Issues of nexus arise for mail-order and internet retailers.



Figure 15.2: Share of U.S. Cigarette Market by type of Cross-Border Activity, 1960-1997

Source: From How Excise Tax Differentials Affect Interstate Smuggling and Cross-Border Sales of Cigarettes in the United States by Patrick Fleenor, Tax Foundation Background Paper #26, October 1998, p. 16. Reprinted by permission.


Use Taxes• Sales taxes are always paired with use taxes that apply to goods not taxed by the sales tax.

• For example, if you live in Kansas City, Missouri, and you go over to Kansas City, Kansas to buy a new car, you will owe Missouri use tax on the new car equal to the sales tax that you would have paid had you bought the car there.

• Use taxes apply to mail order purchases, but are not effectively collected by the states.


Harmonization of Indirect Taxes in a Federation of Governments

• When several local governments in a federation have access to taxing sales, there may be an efficiency gain from harmonizing the rates charged.

• Suppose there are two jurisdictions taxing at high and low rates th, tl.

• Figure 4 illustrates.


Figure 15.4: Efficiency Gain From Harmonization of Indirect Taxes


Harmonization

• The excess burden of the high tax is abc.

• The excess burden of the low tax is ade.

• If the rate were harmonized to .5(th+ tl) the total excess burden is reduced to: bcfg – defg.



Documents

Sales and Excise Taxes Anderson: Sales and Excise Taxes