Generally, a sales tax is paid to governing bodies such as the City of Lawsona for the sale of specific services and goods at the point of sale, with the retailer passing on the tax to the governing body or government (Silbaugh, 2012). Businesses usually pay sales taxes in jurisdictions where they have a nexus in terms of being a brick-and-mortar establishment, an affiliate, an employee, or other form of presence. These sales taxes are charged only to the product’s end user and are closely related to use taxes. In this case, a sales tax for the City of Lawsona would be bad because although it is necessary for the government to levy taxes for government operations, a sales tax would be excessive and would portend negative outcomes for the city. To begin with, a sales tax would reduce consumer spending for the citizens of Lawsona City by reducing their disposable incomes (Silbaugh, 2012).
In turn, reduced consumer spending in the City of Lawsona will lead to a decline in business revenue that could exert negative pressure on business investment and hiring. Further, these sales taxes could also inhibit the city’s economic development and growth, while also reducing the city authority’s leverage in encouraging growth and spending which most jurisdictions achieve by cutting taxes (Silbaugh, 2012). By reducing the citizens’ disposable incomes, sales taxes would also reduce the citizens’ incentive to work as their income becomes less of a financial reward. Secondly, the sales taxes would increase business expenses for the entrepreneurs of Lawsona City, making it difficult for the businesses to become profitable. Businesses in Lawsona already pay significant taxes in terms of business fees and taxes for licenses and permits, property taxes, and employee payroll taxes. Business-linked sales taxes would leave enterprises with fewer funds for business expansion with regard to hiring and investment (Silbaugh, 2012).
Thirdly, sales taxes should be considered a regressive tax system since the minimum wage workers in Lawsona City will pay a similar level of tax when buying goods and services as a rich citizen of the city. In addition, the sales tax would also impose significant administrative requirements and burdens on the city’s small businesses without getting any reimbursements for shouldering the accounting and tax collection burden (Ojede & Yamarik, 2012). Since both small and large businesses are responsible for remitting revenues from sales taxes from their customers, a sales tax would disadvantage small businesses by treating them the same way as large businesses. Furthermore, the City of Lawsona would be entirely reliant on the city’s businesses to collect these taxes from the customers, which they may fail to turn over. When the city loses revenues due to unscrupulous traders, they tend to compensate by increasing revenues through gross receipts tax that is added to the job retailers, in turn overburdening the poorer citizens (Ojede & Yamarik, 2012).
Sales tax does have some benefit, however, including the fact that it levies taxes on spending instead of income thus encouraging he taxpayer to save more and spend less (Ojede & Yamarik, 2012). Unfortunately, since the City of Lawsona is going through economic hardship, the government should be encouraging its people to spend more rather than to save. Secondly, a sales tax may reduce the need for the City of Lawsona to increase costs linked to other existing taxes in the future including income taxes. However, with consumption expenditures representing more than 60% of economic output, taxing personal consumption will be detrimental to organizations in the city which earn profits by competing to attract spending from consumers. Moreover, the disproportionate targeting of the poorer segments of the city means this latter group may spend their entire paycheck on paying the sales tax while richer persons save more by avoiding having to pay the tax (Ojede & Yamarik, 2012).
- Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: The long-run and short-run of it. Economics Letters, 116(2), 161-165
- Silbaugh, L. (2012). Sales tax primer. Denver: Colorado Legislative Council