Monday, November 3, 2014

Sales Tax Increases and Sales Tax Exemptions

As the sales tax increases, so do sales tax exemptions. Exemptions? Yes, exemptions from sales tax or portions thereof are lobbied for by special interests so their special interest, the particular constituency thereof, are exempt. (1)

In the case of the one-fourth cent Guilford County tax increase proposal, the special interest spurring such increase, being predominately the education establishment and associated politico enablers, then cause a special interest domino effect, in that, other special interests and their politico enablers lobby for an exemption to such increase. More insidious, the sponsoring special interest and politico enablers many times incorporate into their sales tax increase proposal an exemption for other particular special interests and their associated politico enablers as a political constituency building exercise to increase the support for such a tax increase proposal on all the remaining non-exempt.

When a special interest desires a focused benefit at others expense, say through a sales tax increase, many times the special interest puts forward a revenue figure that such tax increase will generate. In many cases such increase revenue estimates are wildly off the mark and little or no increased revenue is generated, How so? First one must discount the political revenue estimate due to the exemption effect. Next comes legal tax avoidance by making larger dollar purchases e.g. large appliances, building supplies, etc. outside the political taxing authority's taxing area (purchase in a neighboring area with lower taxes). Also, tax increases inevitably increase the size and scope of the subterranean economy aka black market where items are bought/sold free of any sales tax.

Another effect causing sales tax revenue to be less than politically estimated is related to the seen and unseen. The unseen being transactions that never occur due to the increased tax and hence never become a taxable event. For example, the one-fourth cent tax increase proposal is politically/purposely sold as such a small incremental increase that no one will even notice/be affected. Yet an incremental increase applied to disposable income over time can add up to a substantial sum. Say Jane Goodfellow has $30,000 of disposable income to expend in a one year cycle within Guilford County. With an addition one-fourth cent tax increase Jane is faced with an additional tax of $75 [$30,000 x ¼ cent]. Hence Jane can not engage in transactions of $30,000 of disposable income as her disposable income is now <$30,000. Now multiple this effect by 100,000 Jane(s) and the incremental, once aggregated, becomes a very large number of transactions that never occurred and hence un-taxable.

The reduced transactions, those transactions that never occur, the unseen, then lead to an employment effect. The aggregated reduced transactions mean a faceless, nameless series of individuals were not needed to facilitate the reduced transactions. These faceless, nameless individuals either lost employment or never gained employment. However, when it comes to special interests and their politico enablers, the faceless and nameless are never given a second thought as the collective self-interest of the special interest and their politico enablers is paramount.

(1) Sales Taxes and Exemptions, Stratmann, Reese, and Rachmat, Mercatus Center, George Mason University, 08/2014.