Crazy plan X - discuss

[essentialsaltes]

California tax revenues 2009-2010 (see figure 8):

personal taxes $47B
corporate taxes $8B
sales taxes $26B

Pertinent facts:
Sales tax in my hood is a ridiculous 10.25%.
Sales taxes are regressive.
I chortle with glee when I order something on Amazon and pay no sales tax. Even if I had to pay for shipping (which I never do!) it can still be cheaper than paying sales tax. Of course, I always send a big check to Sacramento to cover all my online purchases every year!

Proposal:
Eliminate sales tax and increase income and corporate taxes.

Positive(?) Effects:
more progressive tax
encourages consumption of California goods and services
eliminates online tax loophole
pleasant shock at cash registers everywhere

Negative(?) Effects:
rich people whining
horrifying shock on paychecks everywhere
some people are unable to calculate tips

Comments

[(Anonymous)]

Not surprisingly, I disagree with some of your "positive (?) effects", but I guess that's just "rich people whining". However, increasing corporate taxes is effectively increasing income taxes since corporate taxes are simply passed on to consumers.

My recommendation is to do away with all taxes except for a flat-rate income tax of something like 20% to 25% with a base exemption of somewhere between $10,000 and $20,000. Easy-peasy-lemon-squeezy.

Donovan

[ian-tiberius.livejournal.com]

I think your sentence above was intended to read "However, increasing corporate taxes is effectively increasing income sales taxes since corporate taxes are simply passed on to consumers."

However, it's not that simple. A corporation is unlikely to simply increase the price of their widgets to directly offset the size of the increase in their corporate taxes. For one thing, if they have outside competitors who don't have to pay California corporate income tax, then suddenly they're taking a hit that their competitors don't have to deal with. (This is possibly the best argument for sales tax over corporate income taxes - like essentialsaltes, it bothers me that sales taxes are regressive, but they do help ensure that California companies are on a level playing field with non-Californian competitors. Of course, that's assuming you buy from a brick-and-mortar shop instead of ordering on-line...)

For another, the corporation would have less of an incentive to cut costs and find efficiencies than it used to. Let's say that the ABC Corporation currently sells one million widgets a year at $10 each, with a production cost of $6 each. Income tax of 10% raises the cost to the consumer to $11 each. One million dollars of sales tax revenue goes to the state, the corporation's gross revenue is $10 million, and after $6 million in production costs they have a $4 million profit, which of course is taxable. At California's current corporate income tax rate for C-corps (8.84%), the state gets $353,600, and the corporation is left with $3,646,400.

Now let's assume that essentialsaltes's plan is adopted. The corporation raises the retail price of its widgets to $11 each to compensate for the abolition of sales tax, and so the cost to consumers remains the same. At the original production cost of $6 million, the corporation nets $5 million before taxes. By sheer coincidence, the corporate income tax was raised from 8.84% to 27.072%, which results in the state's haul being $1,353,600, or precisely one million dollars higher than it was before. So the state still gets the same amount of money, the customer still pays the same, and the corporation is still left with $3,646,400.

But let's say that a brilliant employee comes up with a method of cutting the corporation's production costs in half, to $3 million for 1 million widgets. Under the current system, the corporation now has a $7 million profit, so their tax is $618,800, and the corporation is left with $6,381,200. But under the new system, the corporation would net $8 million before taxes, but since the corporate income tax rate has gone up to 27.072%, it now pays $2,165,760 in income taxes, and is left with $5,834,240, or half a million dollars less than it had under the old system. All these numbers are made up, of course, but the point is that if you jack up the corporate income tax, the corporation has less incentive to be efficient, because their profits are taxed at a higher rate.

Hmm, I started this post in support of essentialsaltes's idea, but I find myself drifting farther and farther from it as I mull this further.

[essentialsaltes.livejournal.com]

Your scenario assumes that all of the previous sales tax revenue is now generated by corporate tax placed on the manufacturer. I was imagining (not for any particularly good reason) apportioning it in the same proportion as current income/corporate tax revenues. Since personal taxes are about 6 times corporate taxes, then only a seventh of that million gets added to the corporation, the rest being paid for by increases in personal income tax.
It's still true that increasing the tax rate will have some sort of disincentivizing (ugh) effect on efficiency, but it won't I think be as strong.
(Also the widget company would presumably be saving 10% on its office supplies and California-sourced widget materials - or at least some % after any price increases.)

[essentialsaltes.livejournal.com]

Using mathemagics, it looks like increasing personal and corporate taxes (each) by 47% would make up for the elimination of sales taxes.
This would raise the corporate rate to 13%.

If the company was less dickish, and raised the price to $10.20, then...

$10.2M revenue
$4.2M profit
x 13% tax = 0.546M tax
leaving $4.2 - .546 = 3.654M after tax profit
slightly more than under the current system.

CA consumers would see a lower total price, which might help sales, but California consumers will have less disposable cash, since it's been pulled out of their paychecks. In principle it all evens out, except that the tax burden falls more heavily on people who (typically) save money rather than spending it.
If the widget company's local suppliers are also less dickish, then the widget company's costs will decline, increasing profit.
Sales outside California might be negatively affected by the higher price.

In your final scenario (using the $11 price), the $8 million profit at 13% tax would yield $1.04M in taxes, leaving the company with nearly $7M, more than in the old system.

---

My main problem with a naive implementation of my plan is that it is too progressive. Right now a poor married couple making $13,000 spends all of that (and maybe more!) contributing to sales tax revenues. Removing food and other taxfree purchases, maybe 5% gets to the state or $650. For income tax, with a standard deduction of $7K, the remaining 6K is taxed at 1%, or another $60. Total tax bill of $710. My plan would eliminate sales tax, but add 50% or so to the income tax. Total bill $90. Yes, it's nice to give poor people $600, but when I work the numbers for me, I start to consider the merits of the tea party. Of course, I don't have a good feel for how much sales tax I give the state, but I know I don't spend all my money. But I think a 'fairer' implementation would make the income tax somewhat more regressive, to make up for the hugely progressive nature of the elimination of sales tax.