Monday, April 5, 2010

Value-Added Tax

For those of you approaching the unit on fiscal policy in your class, the standard line is that fiscal policy consists of two tools - taxes and spending.

Do any of you spend time going farther than that? Specifically, when you discuss taxing, do you talk about the sources of tax revenues? I usually mention three - income, wealth and spending. Income taxes are familiar to our students. Even if they don't have jobs themselves, they are familiar with the concept - tax is paid or withheld based on the amount earned. This is frequently where we discuss proportional (same percentage regardless of income) vs. progressive (higher percentage on higher income) taxation.

Students frequently have an idea about wealth taxes, as well. Property taxes of various kinds are examples of wealth taxes. For most cases your students are familiar with, like property taxes, the level is constant and levied on the property involved.

And sales taxes are a good example of consumption taxes that your students are probably familiar with. And depending on how sales taxes are levied in your state and locality, they may offer a lot of opportunities to discuss how taxes affect behavior. For example, when I lived in Illinois, there was a significant difference in the sales tax depending on whether you purchased in Cook County (Chicago) or in the collar counties. It wasn't unusual for people to "shop" downtown and make the purchase out in the 'burbs.

Here is a good article from The Wall Street Journal about value-added taxes (article is subscription only, but plug the headline into your browser - you may find the article elsewhere). Since they are generally considered taxes on consumption, it's often assumed that they are administered like sales taxes. However, because they can be national in nature, there are many considerations that go into what is taxed, what isn't or at what levels. I think you may like it.

Here is a post by Ezra Klein of The Washington Post on the above article.


Megan M. Orama said...

Why do they have different sales taxes if they are all within Illinois?

Tim Schilling said...

The state of Illinois levies a straight percentage sales tax in all counties. Individual counties and municipalities are allowed by the state to levy an additional tax on top of the state sales tax.

I know we have readers in Illinois. Perhaps they can provide the details of the percentages. I don't recall exactly what the split was. But Chicago/Cook was 8.5% when we moved to VA, as I recall, and the county I lived in was 6% (I think).

TheTeetor said...

I know I stay away from Cook to purchase anything because sales tax is around 9.5%.

Separate chat: Could the government nationalize all taxes and apply their own additional ones if need be? Consequence?
I was told today that I sounded like Mussolini when I suggested the government raise taxes, which would lower peoples ability to spending, but the gov't would then spend that money to lower prices. This way the government is spending money which increases GDP and they can have high taxes.
Are there more benefits I'm not remembering from this morning? What are the cons?

Yadira said...

If the fiscal policy, as what I understood from my teacher, involves the government spending more or less depending on the situation. Then why is it that the government spends more (increasing the defecit), and taxes also go up(which should go down)? Doesn't that make the economy be worse off?

Brady Elizabeth Kirkland said...

As I understand, sometimes sales taxes may be used to make unhealthy products more expensive and reduce the consumption of that product. This was done before with cigarettes, and now it is much harder to afford smoking, let alone find somewhere to do it. Do you think that this could be why they are pushing sales tax on soft drinks? Could this be a move toward lowering the obesity rate or just simply cutting back on carbonated drinks?

Lisa Perfors said...

We have touched a little on fiscal policy today in class. From what I understand, when an economy is in a recession or a depression it is best to spend government money and cut taxes, all for the obvious reasons that it promotes consumer spending and stimulates the economy. However, the bad side will be of course deficit spending. As we all know, Obama has spent a ton of money in the past year alone to stimulate everything, but how do we expect to pay back what we have spent? What things in good times should we do to counteract the spending in bad? and will it be enough?

Tim Schilling said...


You asked the big question. And the answer lies in the statement "People respond to incentives."

Despite what many may say, politicians are people and they like security (keeping their job). Consequently, they are more likely to do what endears them to their voters. And voters prefer to pay fewer taxes and benefit from more spending. And if every politician is judged by similar criteria, you've set up an incentive system that rewards spending and penalizes taxes - resulting in deficits.

Tim Schilling said...

Ms. Kirkland,

You also have hit the nail on the head. Anything connected to rising levels of obesity is being treated like alchohol and tobacco. Let the people who use it pay for the consequences.

But another aspect of the decision is the possibility that the people imposing the taxes believe our demand is relatively inelastic (like tobacco), and that they can raise taxes without seeing a corresponding change in behavior. That would mean more tax revenue on little change in behavior.

The question is, will consumers of soft drinks and other "unhealthy foods" change their behavior significantly, or will they respond as many smokers do and just grumble and keep the behavior?

Tim Schilling said...


What do yo uthink we will do in good times? John Maynard Keynes, who was among the first to advocate deficit spending in times of severe recession and unemployment, also advocated cutting government spending and raising taxes in good times to generate offsetting surplusses. Do you see that happening? What do you think would be the consequences for any politician who advocated higher taxes and reduced spending?