Financial Literacy Begins at Home

This morning, my six-year-old son Solomon was having breakfast and watching his favorite TV show, Really Wild Animals. (It’s a great show, National Geographic cinematography with quippy narration by — I kid you not — Dudley Moore.)

Apparently the same commercials come on the show every morning, because I heard Solomon reciting along with one commercial as it played:

“Whether you’re buying a new home,” Solomon was saying, “or refinancing.”

Then, to himself, he muttered: “Whatever that is.”

Since Solomon is nice enough to explain to me the differences between an alligator and a crocodile, I explained refinancing to him.

He wasn’t that interested.

He is still trying to understand sales tax. He has been saving up to buy a new Webkinz, the first one he’s buying with his own money, and at first he was horrified to hear about the 8.375% he had to pay above the sticker price. Then when he found out that his money helped pay for police, firemen, streets, and the American Museum of Natural History, he quickly became a fan of taxation.


i1der2

Did you tell Solomon that a sales tax is an unfair tax? The word "regressive" might be hard to explain to him, but you could have easily explained to him why a sales tax is unfair...though upper-income people prefer regressive tax schemes.

chappy8

Question. Why is that published prices in the US don't include state sales tax? From my travels abroad, this doesn't appear to be the way they do thing in Europe--where the tax seems to be rolled into the price (i.e. if a price is $10 it is tax inclusive)?

Is there a reason for this? It strikes me as political, that is the US views taxes as 'extra', but maybe there is an administrative or historical reason behind it?

wk633

Taxes in Canada aren't rolled in either. I could see the case more for the US where the total consumer tax can vary from county to county. At least in Canada, you'll pay the same price anywhere in the province.

Although also in Canada some confusing situations can arise depending on how much of something you buy. One cookie is a snack, and is GST-able. 6 or more cookies are not GST-able.

debbart

Because there is not a federal sales tax on our purchases - the Feds get our money through taxing our earnings, among other sources. When we purchase items, the tax varies depending on the state, county and/or municipal tax rates, so there's a very wide range of what the tax might be for folks across the country. An internet purchase from a site that has no "brick and mortar" store in your state may have no sales tax at all.

kah

Mr. Dubner, this story is very cute! You refrained from posting a story about your kid until you had a story that is genuinely really cute! The level of taste and acumen shown here is superhuman! I am agog! Rarely can a parent judge his kid's cuteness factor that well. Very cute story.

Hopefully Anonymous

Kah, I agree, the social intelligence of the freakonomics economists is extremely high. It would be great if they were more meta/transparent about how they formulate and and evaluate their own social performances.

http://www.hopeanon.typepad.com

Kirilius

Coming from Europe to Canada I was really surprised and after 2 years still cannot get used to the tax that's not included in the tag price. It seems to me another way to make the goods look cheaper by hiding part of the price. To me it seems a downright unfair practice. No different than all those "handling fees", "convenience charges" and other hidden fees that are usually in the fine-print and you notice only after you hit the "Buy" button.
The argument is that sales tax varies form state to state and from province to province. Okay, but so what?! Base product prices also vary from province to province and even from neighborhood to neighborhood. Why should I care about that?
As a consumer I want to know how much money gets out of my pocket in total. I don't mind paying sales taxes, what I don't understand is Why am I being forced to always calculate before buying something?

There are customer-protections laws in Europe, which forbid sellers to advertise partial prices. Why is there such a difference between the Old World and the New World?

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htb

The fact that every city/county/state has a different level of sales tax is an argument FOR telling every store to include the sales tax in the prices, not against it!

Imagine a tiny town -- just off the highway, with a single traveler-oriented convenience store -- that decided to have a 50% sales tax. All the locals know about it and refuse to shop there. All the travelers are surprised to discover that their $2 snack cost them $3 with tax. The possibility for this kind of nasty surprise would be eliminated if the sales tax had to be included in advance.

The reason we don't switch is because everyone is convinced that if an item costs 99¢ now, plus 8¢ tax, then the store will round the "tax included" price up to $1.09 instead of setting the new price to exactly $1.07. We'd gain a level of convenience and transparency, and in some cases lose a couple of pennies for a short while after the changeover. These people apparently forget that prices go up anyway, and over time it all comes out in the wash.

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rphtulsa

i1der2,
sales tax is the most fair way to tax a population. the rich spend more, thus they pay more tax (thus, a sales tax is progessive)...i work hard, try to save money, and yet i'm punished by higher and higher taxes for every extra dollar i earn...income taxation is bad economics, if you ask me...repeal the 16th amendment

Kent

We should get rid of income taxes and enact a consumption tax. That's the most fair, efficient, and ethical thing to do. If you want to maintain some progressivity to the tax structure you also do some wealth redistribution as an overlay. :-o

hatch113

What was his reaction when you told him it also pays for court-sanctioned sex change operations for prison inmates? Or for medicaid abortions? Or for endless "feasibility studies"? Or for needle exchange programs? Or for...

I'm kidding, but I think you get my point.

hatch113

One more point, taxes should not be "rolled in." It is good information for the citizenry to understand exactly how much of their money is confiscated by their governments.

Imagine how much lower our income taxes would be if we had to write a check every April instead of glazing over monthly at the incomprehensible pay stubs we get.

parrotscience

I thought taxes included works great in Australia... taxes are part of the price. I believe in Canada (where I am now) stores had the option of including the GST in their advertised price... but where would you shop if one store advertised $100, and the other store advertised $107. That stopped almost immediately after introduction.

JH

Dubner wrote, "Then when he found out that his money helped pay for police, firemen, streets, and the American Museum of Natural History, he quickly became a fan of taxation"

Do sales taxes really go for the services listed? Around here, it's (mostly) property taxes that pay for police and fire protection, gas taxes that pay for streets, and voluntary donations that pay for museums.

Kirilius

"It is good information for the citizenry to understand exactly how much of their money is confiscated by their governments."

I disagree. Sales tax is a single figure that is easy to remember. To me it is mush worse to be cheated every time into thinking that something costs less than it really costs.

To the comment about the 100 and 107 dollars: yes, this is why there should be a law stating that every sellers must advertise the end price only - much like in Europe and Australia. If everybody is rolling the tax in the end price, it will be fair to everyone.

Meezerman

htb-- I think you misunderstand the argument. Differing rates of taxation means that putting the "true price" on every item is very time-consuming. Some items, like books, have a price printed on them. Imagine if every book store had to go through each book with a "$7.99" price tag and change it to $8.43, or $8.38, or whatever depending on where it was being sold. And then the state or county raises or lowers taxes, and you have to go through your entire inventory and remark everything! Much easier just to reprogram the cash register.

And your example is pretty inapplicable, because no place has 50% sales tax. The difference is generally a few percentage points, usually not enough to significantly influence consumer decisions.

lermit

It is a good thing to tax.

.lermit

Nathaniel

It would be pretty impossible to mandate taxes be included in advertised prices, because our taxing entities are so numerous and our media cover far greater areas. If a company produces a widget, they want to sell it for $299, so they buy a TV commercial saying "hey we have a new widget that is $299". Then you go to the store, and it's $299, or maybe on sale for less, and they add your local taxes to the bill.

If the commercial had to include the final calculated taxes for all 100,000 possible combinations of taxes in the country, it would be several hours long.

In the US, sales taxes are assessed by everything from municipal districts to counties, cities, states, and even convention centers or other special zones, all of which overlap in different combinations. Expecting every store to produce new price tags, advertisements, commercials, etc, would be a massive waste of money that would be passed on to consumers. It's just simpler to expect that people know what their local taxes will be (since they voted on them) and consider them when planning purchases.

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Kent

Stephen, Tell your son his taxes will finance stuff like bridges to nowhere in Alaska-- http://dir.salon.com/story/news/feature/2005/08/09/bridges/index.html -- and dance studios for cats.

Ron Paul for President!

stuart

I have been caught out by this a few times on my travels in the US. I see something for sale at 99c. I only have a dollar in my pocket. The charge comes to $1.07. I cannot pay without pulling out the Visa card. Nightmare!!!

Surprisingly often vendors let me off the tax after hearing my Austin Powers like accent...