Survivor 14

[Alex]

Originally Posted by Prudence

Of course, if the producers pay his taxes, wouldn't he then have to pay taxes on that payment, too?

Yes, but then they just pay more recursively until it works out to the appropriate amount. This is the way sales tax works in Hawai'i. Hawai'i's sales tax is actually an exise tax (a tax on business income) that business just pass directly to the consumer (and ends up looking like a sales tax). So they tack on 4%, which is then a 4% increase in business income, so that 4% is taxed at 4%, which is passed on to the consumer and becomes income which is taxed at 4% and so on until 4% is a very small amount.

The sales tax is itself taxed. So the 4% (when I was there) exise tax is really something like 4.17% when it gets added to a purchase price.

[Ghoulish Delight]

Originally Posted by Alex Stroup

The sales tax is itself taxed. So the 4% (when I was there) exise tax is really something like 4.17% when it gets added to a purchase price.

Except that due to the properties of supply and demand, the purchase price ends up being lower than it would if there weren't a tax for any goods that are not perfectly inelastic (namely, everything). So something that would cost $10 in a non-taxed world would not cost $10.42 (which would leave the seller with $10 revenue after the exise), it would be somewhere in between $10 and $10.42. As long as there is elasticity in demand, the producer will always share some of the cost of tax with the consumer.

[Alex]

Except they don't. Everything you buy in Hawaii has (had, anyway) 4.17% added. I never saw anybody competing on price by eating some of the tax.

And industry wide I'd wonder as well since almost everything sold in Hawai'i in imported from somewhere else so that purchase price is dictated by forces outside of the tax structure in question.

But yes, there is undoubtedly some price suppression caused by the tax, but the point was to demonstrate the recursive taxing that turns a 4% announced tax into a 4.17% real tax. And that it would work the same way if you want to give someone $1 million, after taxes.

[Ghoulish Delight]

Originally Posted by Alex Stroup

Except they don't. Everything you buy in Hawaii has (had, anyway) 4.17% added. I never saw anybody competing on price by eating some of the tax.

In a system where the tax always existed, it's not really visible. If the tax were to suddenly disappear, I bet 4.17% of my income that prices would not simply fall down to the sans-tax level, they'd settle somewhere above it. How much so depends on the price elasticity of the product.

And industry wide I'd wonder as well since almost everything sold in Hawai'i in imported from somewhere else so that purchase price is dictated by forces outside of the tax structure in question.

Surely an added wrinkle complicating things, but the importers and resellers still mark up the price from whatever they're paying to import. The amount of that markup is still subject to the laws of supply and demand.

But yes, there is undoubtedly some price suppression caused by the tax, but the point was to demonstrate the recursive taxing that turns a 4% announced tax into a 4.17% real tax. And that it would work the same way if you want to give someone $1 million, after taxes.

Yeah, I know. I just like to bring up that finer point of sales tax that most people aren't aware of. A X% increase in sales tax does not translate directly to an X% increase in prices to consumers.

[Alex]

Yeah, I'm aware of it, but if we want to get in the nitty gritty of it all, price elasticity isn't the only major factor to take into account. 2 applie pies at McDonald's are going to have a base cost of $1, no matter what the tax environment (and for reasons that have nothing to do with price elasticity; demand will not fall significantly if they charge $1.05 instead of $1.00). So in this case, the full tax weight is born by the consumer.

The more perfect the marketplace in question, and therefore the more perfectly margins have been driven out of pricing, the more perfectly the tax will be a direct burden on the consumer. So the price impact of taxes will vary quite a bit from product to product but will be most felt in low-margin products with rigid production costs.