Friday, 17 July 2015

The impact of Sales Tax on selling prices

Using the same source for the relative price of goods for all US states (see previous post but one) and this handy table, from The Tax Foundation... we establish that there is no correlation whatsoever between the level of sales taxes (zero in three states, up to 9.46% in Tennessee)*.

Which is what we would expect. By and large, consumers have a lot of choice how to spend their money and whether to spend it or not; each business is set up to produce a fairly constant number of a narrow range of goods.

If demand is more price sensitive than supply, the supplier bears the tax (selling price unchanged and the supplier accepts lower profits per unit); and if supply is more price sensitive than demand, then the consumer bears the tax (prices go up by the amount of the tax).**

We've seen exactly the same with changes in the VAT rate in the UK and other European countries, selling prices remain unchanged, but profits and/or output levels change quite a lot - and nobody has ever produced any data to suggest otherwise. You can pick holes as much as you like, those are just observable and easily explainable facts.

* Actually, the coefficient of correlation between prices and the state average Sales Tax rate comes out as negative 0.16, heck knows how that happened.

** So land is at one extreme end of the spectrum and tobacco is at the other.


James Higham said...

I'll not buy from someone who gives a price net of VAT.

Mark Wadsworth said...

JH, that's against the law anyway.

Lola said...

JH. Well, I will. My preference is for the seller to quote both the net and gross of VAT prices. Makes one think.

Physiocrat said...

You can see the same thing in duty-free shops at airports and on ships. They are only slightly less than normal shop prices. This adds up to increased profits, which are claimed as higher rents. These in turn end up in the airport owners' profits and are in theory taxable as corporation tax. So duty-free need cost the government nothing in lost tax.

You could set up tax-free marketplaces where the stallholders bid for the pitches and paid a charge to the local authority. The local authority might then deduct the running costs and remit the surplus to HMRC. It would probably yield at least as much as the tax that would have been collected in the normal way, and without a mass of paperwork.

Mark Wadsworth said...

L, that is my preference too.

Phys, I have done the thought experiment with duty free market stalls before, but the Homeys shot the idea down in flames: "In that case why shouldn't private landowners be allowed to declare their land to be tax free and charge higher rents?" etc.

Dinero said...

I follow your reasoning that evidence is paramount. However don't you think there is an absence of supplier price competiton in that model.

Mark Wadsworth said...

D, again, that is the dilemma.

Most retailers charge much the same prices every in the country. The smaller the country the lower the differences so in the UK prices for goods are more or less the same everywhere.

Is this evidence of collusion by retailers (pushing prices up) or evidence of fierce competition (pushing prices down)..?

Nobody has ever proved the former and there is lots of evidence for the latter e.g. in this post.

More to the point, if retailers did have pricing power (i.e. the ability to restrict supply to the profit maximising point), then higher sales taxes would lead to higher prices.