From: OPE-L Administrator (ope-admin@ricardo.ecn.wfu.edu)
Date: Fri Jun 04 2004 - 07:39:28 EDT
----- Original Message ----- From: "Jurriaan Bendien" <andromeda246@hetnet.nl> Sent: Thursday, June 03, 2004 6:00 PM Subject: Another bit about taxation Hi Anders, A brief comment on your OPE-L query. You said: - What would be the effect of an non-refundable indirect tax of say 5- 10%? Since there is a lot of tax evasion from firms and rich persons, a turnover tax would actually hit them more than the complicated system of income taxes, that on paper is progressive but in reality is much less so - some economists in Norway argue that the tax system is in fact regressive for the really rich. Reply: It is not clear to me that a turnover tax is always more difficult to evade or avoid than an income tax, or that it is necessarily simpler to administer (since it is levied on most sales or costs). A sales tax may not be levied on all commercial transactions. In New Zealand for example, they simply didn't impose a goods & services tax on imported goods and services (reducing input costs and the cost of consumer durables, other things being equal). It all depends on how exactly the tax is implemented, and what tax breaks exist, whether all goods and services are taxed at the same rate or not. You cannot understand the effect of a turnover tax on incomes unless you also consider the levying of other taxes, and you consider the actual volume and value of sales and purchases, by different social classes. It is hypothetically possible that if a turnover tax replaced an income tax and other tax, that employers would pay less tax. If a turnover tax is levied while personal incomes are also taxed, then unless there is some way to write off the income tax, you obviously pay more tax than you did before. As a general rule you can say that the tendency is for taxes to be levied on those least able to resist or evade being taxed, and that a sales tax weighs proportionally more on a lower income, since a larger proportion of it must be spent, and less can be saved. You said: - That progressive taxes, i.e. the labour movement using its political power to correct injustices created in the market, shifts peoples political focus away from the injustices of the market economy and making them concerned about the complexities (injustices and irrationalities) of the tax system. With a radical simplification of the system - a turnover tax - political focus could shift the power struggle back to the market correcting the injustices where they are created. reply: It sounds poetic and sexy. But it's not clear that the exact mode of taxation has a lot to do with how people view the injustices of the market economy, and in reality many corporations pay no tax (in net terms) at all. I remember that a Goods & Services Tax was introduced in New Zealand in 1986 (see e.g. www.dsanz.co.nz/ taxation/WFDSA_Congress_Presentation.pdf or http://www.taxpolicy.ird.govt.nz/publications/files/html/gstimported/c3.html or other sites) but this tax did not really change anything politically all that much except that now it is less obvious how much tax workers are actually paying, since you would have to total up all the items you buy with your wage, and so on. And in the statistics it's difficult to distinguish between what workers pay in net sales tax versus what employers pay in net sales tax. Really what people look at, is their net real income, and what they can buy with their net real income, and what they tend to do with their savings is buy a mortgage on a house if they can. In this sense, the stockholder is no different than the wage earner - they are concerned with real disposable earnings, and what they can actually buy with them. The corrollary is that you have to look at the total tax burden placed on individuals and social classes. But the whole trend in statistical information is to hide the distribution of real disposable income and the source of tax revenue more and more, and a universal sales tax, although it could in principle generate more accurate data, also can help to hide the real distribution of real disposable income. Certainly, in New Zealand they stopped producing even a real disposable income index (by quintiles) and started to produce a labour cost index instead which measured the costs of employment of workers to employers, an extremely biased initiative. You might calculate a real wage by deducting income tax and adjusting for inflation, but the statistics obviously do not show how much tax was paid in respect of consumer goods & services bought with the net real income received (you can only infer this from household income & expenditure estimates). Let's take wage earners A, B, and C each with an identical household setup who meet each other in the supermarket, where they're buying groceries, and trace this out in a very simple example, assuming a progressive income tax is already being levied: A earns a gross annual wage of $100,000, taxed at let's say 50%, pays $50,000 income tax and obtains disposable income of $50,000. He buys consumer items N to the value of $15,000 on which he pays a standard 12.5% sales tax, i.e. he pays $1,875 tax. He saves the rest of his income, i.e. $35,000. B earns a gross annual wage of $40,000, taxed at let's say 30%, pays $12,000 income tax and obtains disposable income of $28,000. He buys consumer items P to the value of $15,000 on which he pays a standard 12.5% sales tax, i.e. he pays $1,875 tax. he saves the rest of his income, i.e. $13,000 C earns a gross annual wage of $20,000, taxed at let's say 15%, on which he pays $3,000 income tax and obtains disposable income of $17,000. He buys consumer items Q to the value of $15,000 on which he pays a standard 12.5% sales tax, i.e. he pays $1,875 tax. He saves the rest of his income, i.e. $2,000. In that case, the government collects $65,000 income tax on wages and $5,625 sales tax on items bought with those wages, giving a total tax levy of $70,625 on a total gross wage bill of $160,000 which entails an overall tax rate for the wage earners of 44.1%. If we now ask, under these conditions, what proportion of their earnings A,B and C pay in income tax, sales tax and total tax out of their gross wage income, and what they can save, we get the following result: A: 50% income tax, 1.2% sales tax, 51.2% total tax, 35% of earnings saved B: 30% income tax, 4.7% sales tax, 34.7% total tax, 32.5% of earnings saved C. 15% income tax, 9.4% sales tax, 24.4% total tax, 10% of earnings saved As you can see, if we assume that each of the three wage earners have the same consumption requirements but that their gross wages vary, C who is lower paid in terms of his gross wage pays is worse off, because - he pays proportionally more sales tax on his gross wage income, - the increase in the total tax he pays, if a sales tax is applied in addition to income tax, is also proportionally greater, - the proportion he can save, is also disproportionally reduced by the sales tax. Assume now e.g. that on the $45,000 of items bought an overall net profit margin of 10% applies, then $4,500 of the wage income spent purchasing the items represents the net profit income for the suppliers of goods. Let's assume a uniform profit margin of 10% and say that the manufacturer sold the goods to a distributor for $36,450 (transaction X), who resold them to the retailer for $40,500 (transaction Y) and that the retailer sells the goods to wage-earners A.B, and C for $45,000 (transaction Z). In that case, if a standard sales tax is levied at 12.5% three times, in three successive transactions, this yields a total sales tax levy of about $15,244, where sales tax levy at X = $4,556.3 sales tax levy at Y = $5,062.5 sales tax levy at Z = $5,625 In that case, the actual amount of sales tax levied on the items bought by A,B and C would equal 33.9% of the final sale value of the goods bought. That is to say, prices for the items have not been raised just by 12.5%, but instead comprise over a third of the final sale price. In reality of course, it obviously doesn't work quite like that, but this is just to illustrate very simply, that if a standard sales tax of 12.5% applies, then the percentage price increase resulting therefrom, can be a higher percentage of the final consumer price than this official standard tax rate. Assume that A,B, and C are the only employees who all work for employer D in his plant. We already know that the total gross wage bill is $160,000, income tax levied on annual wages is $65,000, an overall net profit margin on the final sale value of output of 10% applies, and a real sales tax rate of 33.9% on the final sale value of output applies. We could then make up a hypothetical example to calculate the value composition of output: Assuming a total capital value of gross output at final sale price in the stores (after intermediation) = $480,000 income tax on profit at 28.5% = $13,680 net profit on output value (employer D's profit, distributors profit, retailers profit, interest, rent, insurance profit) = $48,000 income tax on wages at 40.6%= $65,000 net wage income = $95,000 sales tax levy incurred on the total final sale value of output at 33.9% = $162,720 depreciation charge on fixed equipment at 12% of gross output value = $57.600 total materials cost = $35,000 incidental expenses = $3,000 In that case, we obtain the following composition for the value of output: variable capital component of output = $95,000 constant capital component of output = $95,600 total productive capital consumption for output = $190,600 surplus-value = $289,400 gross profit = $61,680 net profit = $48,000 value composition of capital used up = about 100% rate of surplus-value = 304.6% total tax levy on total output value = $241,380 tax rate on output value = 50.3% We noted previously that what the three workers A, B and C actually bought for a sum of $45,000 meant an overall tax rate of 44.1% of their combined gross earnings, levied at source and levied at expenditure. But if we look at the tax content of the value of output in our example, we see that the actual total tax component in the final value of the output they have bought some of, is higher, namely 50.3%. Yeah, you say, that's just because you've included the tax paid by employer D, plus the distributors and retailers of his output, whereas previously you only included taxes levied on gross wages received and items bought with those wages. Agreed, part of that tax liability is not on the wage-earners spending their wages. But the point is, they still pay for that, in the final price for the goods that they buy ! And they also pay through what they buy in the store for the profit margin incurred on that output. A profit margin is of course not the same thing as a profit rate. The profit margin is calculated on the value of output (if you like, the turnover, i.e. the sales volume), but the profit rate relates the annual income flow to the value of the stock of capital assets invested (tied up during the accounting year). Assume a capital-output ratio of 2:1, then the total capital outlay in my example would be 960,000 and the value rate of profit would be 30.1% and the after-tax rate of profit would be 5%. You said: - Unlike in Marx time, everybody can vote and decide what the taxes are going to be spendt on. That the democratic system is *very* imperfect is obvious, but still people have a fair amount of influence on gov. policies. That I believe they vote against their true interest is another issue. Reply: In my previous comments, I have tried to suggest that this may in fact not be the case, because while you can vote for parliamentary representation, you delegate decision-making and cannot vote directly about the collection and expenditure of tax funds, unless a specific referendum is taken. You don't give a mandate to spend taxes in such-and-such a way. That is how it is in representative democracy. It creates the possibility that governments will engage in military adventures and spending sprees for which they had no real mandate, and enrich particular social classes. Moreover, the problem with taxes paid without any specific prior mandate for the expenditure of those specific funds is that the allocation of tax funds is in reality decided by the apex of the public service and by the parliament. Again, this provides plenty scope for the spending of tax funds for which there is no real mandate. Necessarily, to understand the effect of any tax, you need to study the impact of taxation quantitatively, and consider its effect on real economic behaviour. Only then can you understand the real tax burden, the effect of tax on real net income, and the movements of these variables over time. regards Jurriaan
This archive was generated by hypermail 2.1.5 : Sat Jun 05 2004 - 00:00:01 EDT