(OPE-L) Re: Another bit about taxation

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


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