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Journal of No. 118

April 20th, 2010

Crazy plan X - discuss @ 04:57 pm

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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!

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
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Date:April 21st, 2010 12:19 am (UTC)
I'm one of these crazy people that reports the sales tax I don't pay when ordering online at tax time.
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Date:April 21st, 2010 12:20 am (UTC)


Good luck to your Local Sports Team.

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Date:April 21st, 2010 12:44 am (UTC)
Heh. Same here. Good luck to the Avs.
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Date:April 21st, 2010 12:19 am (UTC)
tracking, as it's relevant to my interests.
Date:April 21st, 2010 05:29 am (UTC)
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.

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Date:April 21st, 2010 06:54 am (UTC)
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.
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Date:April 21st, 2010 01:52 pm (UTC)
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.)
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Date:April 21st, 2010 04:15 pm (UTC)
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.
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Date:April 21st, 2010 12:23 pm (UTC)
There is this to be said for a sales tax - it's visible. You are reminded every time you buy something of how much you are being taxed for that purchase.

The Constitution contains a prohibition against double taxation. Well, technically I suppose one could argue we have no double taxation; they don't stop at double. You're taxed when you earn it, when you spend it, when you pass it on to your kids, many of the goods you buy with it are taxed again above and beyond any sales tax. Spend it on a car, and you'll pay sales tax on its value to buy it, sales tax and gasoline tax to fuel it, highway tax to drive it on the roads, tax to put tires on it, tax to dispose of the old tires, and even an excise tax on its value (again) every year merely for continuing to own it. In fact, in California, if you buy it used, and it's been sitting on a lot unregistered, you will pay tax on the time you DIDN'T own it — the State requires you, the buyer, to retroactively register it for the time it was sitting on the lot unregistered while the dealer owned it, which is an utterly shameless rip-off. (I was utterly gobsmacked when I ran into this one in 2005, and vowed never to return to California when I left again. I do my best never to spend another dollar there.)
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Date:April 21st, 2010 04:59 pm (UTC)
unixronin, would you please direct me to the article and section of the United States Constitution which prohibits double taxation?

(When you discover that the phrase "double taxation" does not appear in the text of the Constitution, you might want to do a little research. This research may lead you to the Commerce Clause, and the realization that the "double taxation" prohibition has to do with multiple states imposing taxes on the same interstate commerce transaction, and nothing to do with all the things you're bemoaning above.)
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Date:April 23rd, 2010 12:36 am (UTC)
I support the increase of income and, especially, corporate taxes.

There's more to life than taxes (death, I know). It's related to health care.

If we have universal health care, people won't go bankrupt making medical payments.

If there's more money for better public schools, people won't need to pay high tuition to send their kids to private schools.

If there's more money for road improvements, people won't need to pay car repair bills.

In other words, if the government had more money, and used it efficiently, we citizens wouldn't need as much, and what we wanted as non-essential items, we'd be able to afford (less sales tax).

The problem with California is Prop 13. We can't increase corporate/income taxes (not without a 2/3 majority, impossible with obstinate GOP who enjoy using donations for trips to Voyeur so they can talk about preventing the lesbians they're ogling from getting marriage benefits). So we tax every little thing we can, especially sales. There's a proposal floating around that wants to increase the tax on alcohol by a shitload (my math may be off, but it's an insane amount).

These koo-koo proposals come around because
a) Baby Boomers want too much stuff, and want other people to pay for it
b) we can't increase taxes to pay for demands (the tea party wants less government, but still wants their Social Security)
c) we end up overpaying for stuff because we use bonds instead of taxes and have to pay interest

Ultimately, I think lower sales tax and higher corporate (income) taxes is a better option. A lower cost to buy goods, means other people (if they don't have to worry about health care costs), possibly even other nations, will buy more product. Increased sales means more jobs. With lower corporate taxes or income taxes, the rich get richer. They don't roll profits onto employees, just management.

I want to lower the ceiling (fewer rich people) to raise the floor (fewer poor people). If our household take-home income dropped another 20-25%, but it meant I wouldn't have to send money to my mom for her dental bills and cancer treatments, or other people didn't have to send their mothers and fathers money for treatments, it'd be so worth it.

I'm a socialist, and proud of it.

Journal of No. 118