RE: Does consumption tax include real estate sales? (Was: Consumption 2)

From: Lisa Dusseault (
Date: Fri Mar 30 2001 - 09:59:55 PST

> > > The blue collar worker is *starting his own business.*
> > > It's a B2B transaction. It's not taxed.
> >
> > That's fair in principle. But it comes as the expense
> > of administrative complexity and inevitable widespread
> > cheating.
> The latter, perhaps... the first is a non-issue. Purchases made
> under any federal employer tax ID number would be exempt. Having said
> that, a transaction tax is simpler.

A transaction tax may be simpler, but it may have undesirable consequences.
Middlemen often make a system more efficient due to specialization; they buy
up stocks of an item (say bicycle water bottles) and resell them. There are
often many middlemen. Sometimes the middlemen have more information than
the manufacturer about where the market is (bring a load of water bottles to
a local triathlon) and more information than the purchaser about where the
supplies are and at what price (get the water bottles cheap from somebody
that wants their brand name on everybody's bike bottle, plus bulk discount).
A transaction tax would make middlemen structures punitively expensive thus
distort the market.

Next consider the case of value-add chains of manufacturing. The bicycle
gear assembly producer has suppliers of washers and raw metal and such; but
their product is not usually the end product, it goes to full-bicycle
assemblers. Taxing every step along that chain would distort the market by
inducing manufacturers to make things themselves. That's a terrible
reduction in the efficiency that can come by just specializing in producing
one thing in massive quantities, like washers.

This finally leads to a whole new class of cheating where corproations come
up with fancy structures to avoid taxes by owning parts of their "suppliers"
thus making the transfer of parts into a non-transaction.

There are whole books, nay, classes, nay, entire degrees devoted to studying
taxes. We all like to think it's intuitive and that we're capable of
tweaking a tax system to make it "better". Hey, even elected politicians
think they're able to improve the tax system.


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