1 principles of tax analysis © allen c. goodman, 2015
TRANSCRIPT
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Principles of Tax Analysis
© Allen C. Goodman, 2015
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Lots of Different Taxes
Income/Business Consumption Wealth
Personal Income Sales Property
Corporate Income Use Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
Gambling
Most economistsDon’t like this one.
Why?
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Lots of Different Taxes
Income/Business Consumption Wealth
Personal Inc. Sales Property
Corporate Inc. Use (e.g. Roads) Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
Gambling
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Lots of Different Taxes
Income/Business Consumption Wealth
Personal Inc. Sales Property
Corporate Inc. Use (e.g. Roads) Estate
Value-Added Motor Fuel Inheritance
License Alcoholic Beverage Transfer
Hotel/Motel
Restaurant Meals
Telephone Call
GamblingWhy good?Why bad?Why hard?
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Tax Incidence
• Who REALLY pays the tax
• If you buy something at the store, you give $ to the clerk, and the store pays $ to the gov’t, but who really pays?
• If you rent an apartment and property taxes in your city rise, what happens to the rent that you pay? Who really pays?
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Tax Incidence and Burden
• Progressive Tax– Tax Burden/income ↑
as income ↑
• Proportional Tax– Tax Burden/income
is constant as income ↑
• Regressive Tax– Tax Burden/income ↓
as income ↑Income
Tax
These are real slopes,but it’s hard to see them.
Following slides willbe similar but not to scale.
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Progressive Tax
• Progressive Tax– Tax Burden/income ↑
as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – Gas Guzzler Tax
• Federal Income TaxIncome
Tax
T
Y
Y1 Y2 Y3
Ave.TaxRate
Mgl.TaxRate
T
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slopeNot to Scale
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Proportional Tax
• Proportional Tax– Tax Burden/income
constant as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – Medicare Tax
Income
Tax
Y1 Y2 Y3
T
Y
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slopeNot to Scale
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Regressive Tax
• Regressive Tax– Tax Burden/income ↓
as income ↑– Slope of ray = T/Y– Mgl Tax Rate =
ΔT/ΔY
• Example – FICA tax for Social Security
Income
Tax
Y1Y2 Y3
Mgl.TaxRate
T
Y
ΔT
ΔY
Average Marginal
Ave Ray to origin
Mgl slopeNot to Scale
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FICA, Medicare Taxes - 2014
0
1000
2000
3000
4000
5000
6000
7000
8000
0 20000 40000 60000 80000 100000 120000 140000 160000
Income
Tax
es FICA Tax
Medicare Tax
FICA and Medicare FICA isRegressive
Medicare isProportional
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General Rules for Taxes
• Only way (legally) to avoid taxes is to change behavior.
• The more that one agent can avoid the tax, – the less is collected– the more someone else pays
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Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• Partial eq’m analysis looks at a single market.
$
Q
D S
Q0
P0
EfficientQuantity! WHY?
EfficientQuantity! WHY?
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Taxes and Efficiency
• Excise Tax– Tax on a particular good.– Look at a unit (as oppose to
percentage) tax.• $1 Tax Collected on
DEMANDERS
$
Q
D S
Q0
P0
$1
Why is this treated as a downward shift?
Suppose you buy gasoline at $3.00 per gallon.
Your state imposes a $1.00/gallon tax.
You keep your receipts and pay tax.
You demand gas based on $2.00 per gallon, because you know you’ll have to pay an additional $1.00. Your demand curve shifts DOWN by $1.00.
3.0
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Total Revenue
Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• $1 Tax Collected on DEMANDERS
$
Q
D S
Q0
P0
Who Pays?
P1
Q1
D'
$1
3.0
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Taxes and Efficiency
• Excise Tax– Tax on a particular
good.– Look at a unit (as
oppose to percentage) tax.
• $1 Tax Collected on DEMANDERS
$
Q
D S
Q0
P0
What’s DW$
P1
Q1
Prod.
Con.DW
$1
3.0
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Total RevenueProd.
Suppose the $1 is on Suppliers?
$
Q
D S
Q0
P0
• Excise Tax– Tax on a particular
good.– Look at a unit (as
opposed to percentage) tax.
• $1 Tax Collected on SUPPLIERS
Who Pays?
Cons.
EXACTLY the same result.
EXACTLY the same result.
DW
P1
Q1
3.0
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If result is same …
• Why do we usually collect sales taxes from the sellers?
• Do we ever try to collect it from the buyers?
• What happens when we do?
The Internet
• Lots of issues with sales taxes and the internet.
• There have been proposals for a Marketplace Fairness Act (MFA)
MFA – Key Findings (1)
• The Marketplace Fairness Act (MFA) would allow any state to require sales tax collection by out-of-state retailers, if the state simplifies its sales tax system.
• Sales taxes are paid by consumers, but are usually collected and remitted by retailers at significant cost.
• State taxation power is generally limited to individuals and businesses within the state’s borders, to prevent harm to the national economy from tax exporting.
http://taxfoundation.org/article/marketplace-fairness-act-primer
MFA – Key Findings (2)
• Some states are nonetheless passing “click through nexus” statutes and demanding out-of-state retailers collect sales tax, leading to extended litigation and uncertainty. Other states are working with the Streamlined Sales Tax Project for greater tax uniformity.
• A federal solution is needed and must allow states to collect sales tax on sales to their residents, eliminate unjustifiable tax distinctions between identical items, define the limits of state tax authority, and simplify the tax system to reduce compliance burdens.
• The MFA bill is in this vein but would benefit from software compatibility requirements, a blended tax rate option, limits to state audit authority, and federal jurisdiction over disputes.
http://taxfoundation.org/article/marketplace-fairness-act-primer
MFA – Key Findings (3)
• “Hybrid Origin-Sourcing” (HOS), while appealing in its simplicity, would require fundamentally restructuring how sales taxes work, confusing consumers and posing immense administrative and legal obstacles.
• Because HOS allows states to tax consumers without minimum contacts with the state, it likely would violate the U.S. Constitution’s Due Process Clause.
http://taxfoundation.org/article/marketplace-fairness-act-primer
Sales Tax Breadth
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Important Concepts!
• DW loss relates to the change in quantity. Remember, we saw that efficiency related to quantity. The more behavioral change that a tax makes, the more DW loss.
• Incidence relates to elasticity of demand and supply. Remember elasticity addresses whether quantity changes a little or lot. If you can change your behavior a lot, and avoid the tax, its incidence on you is small.
• If you can’t change your behavior and avoid it, its incidence is a lot! Does it matter how we collect the tax?
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Total (yellow)
Another Gas Tax Example
• Suppose that Southfield puts a $1/gallon tax on gas.
• Let’s look at demand and supply.
• Why did I draw demand and supply like I did.
$
Quantity
D
S
Who Pays?
Q0
$1
P0
P1
Q1
Price ↑ a little;Quantity ↓ a lotMost is paid by
producers.
S'
Consumer
by producer
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TaxCollected
Another Gas Tax Example
• Suppose that the US puts a $1/gallon tax on gas.
• Let’s look at demand and supply.
• Why did I draw demand and supply like I did.
$
Quantity
D
S
Who Pays?
Q0
$1
P0
P1
Q1
Price ↑ a lot;Quantity ↓ a littleMost is paid by
consumers.
S'
WHY?
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Excess Burden of Excise Taxes – Gen’l Eq’m
• Previously, we looked only at a single market. Even if a tax doesn’t change quantity in a given market it may change behavior in other markets. U0
U1
U2
• We can’t measure U1 – U2, but we CAN, in principle, measure the cost in $ of this excess burden.
Gasoline
Other Goods
Excess Burden
EB is like DW Loss
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Even if Q doesn’t change! – Gen’l Eq’m
• Previously, we looked only at a single market. Even if a tax doesn’t change quantity in a given market (again, suppose it’s gasoline) it may change behavior in other markets. U0
U1
U2
• Again we can’t measure U1 – U2, but we CAN, in principle, measure the cost in $ of this excess burden, even though the amount of gas did not change.
Gasoline
Other Goods
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Sales Tax on the Internet-2009• Margo is passionate about rare orchids but can't find
them in Indiana, so she orders her supplies online from an orchid supplier with headquarters in Vermont. The supplier has all of its facilities in Vermont and collects payment in Vermont. Margo does not have to pay Indiana sales tax (or Vermont sales tax) on her orchids.
• A few months later, the supplier opens a warehouse in Indiana to handle its online orders for the entire country. Margo continues to order her orchids from the headquarters in Vermont but she must now pay Indiana sales tax. Her ride on the tax-free train is over.
• Many states have reevaluated their attitude towards collecting use taxes. For example, New York state has added a line to income tax returns requiring all residents to calculate how much they should pay on Internet, mail order, or out-of-state purchases.
http://www.nolo.com/legal-encyclopedia/article-29919.html http://articles.latimes.com/2009/dec/24/business/la-fi-hiltzik24-2009dec24?pg=3
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http://www.streamlinedsalestax.org/uploads/images/state%20map%202014_1_1.jpg
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Marketplace Fairness Act of 2013 • The Marketplace Fairness Act grants states the authority to compel
online and catalog retailers ("remote sellers"), no matter where they are located, to collect sales tax at the time of a transaction - exactly like local retailers are already required to do. However, there is a caveat: States are only granted this authority after they have simplified their sales tax laws. THESE ARE “USE TAXES”.
• The Marketplace Fairness Act requires that states must simplify their sales tax laws in order to ease those concerns and make multistate sales tax collection easy. Specifically, states seeking collection authority have two options for simplifying their sales tax laws.
• Option 1: A state can join the twenty-four states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last eleven years by forty-four states and more than eighty-five businesses with the goal of making sales tax collection easy. Any state which is in compliance with the SSUTA and has achieved Full Member status as a SSUTA implementing state will have collection authority on the first day of the calendar quarter that is at least 90 days after enactment.
http://www.marketplacefairness.org/what-is-the-marketplace-fairness-act/
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MFP of 2013 – 2 • Option 2: Alternatively, states can meet essentially five
simplification mandates listed in the bill. States that choose this option must agree to:– Notify retailers in advance of any rate changes within the state– Designate a single state organization to handle sales tax
registrations, filings, and audits– Establish a uniform sales tax base for use throughout the state– Use destination sourcing to determine sales tax rates for out-
of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there). Again the USE criterion.
– Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.