Retail sales Tax Sales taxes generally take one of two forms A unit tax is a given amount for each unit purchased (e.g, motor fuel tax that is a certain number of cents per gallon of gasoline An ad valorem tax is computed as a percentage of the value of the purchase
6 Retail Sales Tax • Sales taxes generally take one of two forms: – A unit tax is a given amount for each unit purchased (e.g., motor fuel tax that is a certain number of cents per gallon of gasoline). – An ad valorem tax is computed as a percentage of the value of the purchase
Retail sales Tax Rationalizations for a sales tax Administrative Considerations Collected at retail level. have to monitor fewer units Nonetheless, still difficult, and defining the tax base somewhat arbitrary Underground markets/ smuggling Optimal Tax Considerations It can be shown that the income tax is not optimal differential commodity taxes can improve welfare Inverse elasticity rule could guide the rate setting
7 Retail Sales Tax • Rationalizations for a sales tax – Administrative Considerations • Collected at retail level, have to monitor fewer units. Nonetheless, still difficult, and defining the tax base somewhat arbitrary. • Underground markets / smuggling – Optimal Tax Considerations • It can be shown that the income tax is not optimal, differential commodity taxes can improve welfare. • Inverse elasticity rule could guide the rate setting
Retail sales Tax Rationalizations for a sales tax Other considerations Sin taxes Merit goods
8 Retail Sales Tax • Rationalizations for a sales tax – Other considerations • Sin taxes • Merit goods
Retail sales Tax Efficiency and Distributional Implications Would the pattern of sales tax rates minimize excess burden? Overall excess burden depends on both the elasticities of each good and the degree of substitutability or complementarity with other goods Equal tax rates is almost certainly not efficient
9 Retail Sales Tax • Efficiency and Distributional Implications – Would the pattern of sales tax rates minimize excess burden? – Overall excess burden depends on both the elasticities of each good and the degree of substitutability or complementarity with other goods. – Equal tax rates is almost certainly not efficient
Retail sales Tax Efficiency and Distributional Implications When viewed in a lifetime perspective(rather than an annual perspective), general sales taxes are somewhat progressive More generally, however, statutory incidence of sales tax is not the same as the economic incidence 10
10 Retail Sales Tax • Efficiency and Distributional Implications – When viewed in a lifetime perspective (rather than an annual perspective), general sales taxes are somewhat progressive. – More generally, however, statutory incidence of sales tax is not the same as the economic incidence