The Deadweight Loss of David Foster Wallace’s Tax

In his posthumous novel The Pale KingDavid Foster Wallace describes a fictional progressive sales tax in Illinois that imposes higher rates the larger the amount purchased.  Sounds good and fair — tax those who make larger purchases. Not surprisingly, it generates a substantial deadweight loss: People buy a few things, take them to their cars, then come back and buy more.  Auto dealers sell parts separately to reduce the average tax rate on consumers. If this sales tax was real, the deadweight loss would be borne especially heavily by low-wage people.  Those who feel pinched for cash but whose time is less valuable would be more likely to engage in tax-avoiding activities like repeated small purchases.  (HT to TW)

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  1. JoeyM says:

    didn’t new york have this a couple of years ago – it didn’t tax shopped items if it were below $100

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  2. jonathan says:

    This is the kind of thing that makes me wonder about economists.

    A system like this couldn’t exist in our society. It could only exist in one that is highly coercive or where there is tremendous social cohesion imposing norms of behavior. As my dad would tell me, rationing in WWII worked on the whole because we felt we were in it together.

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  3. Jon says:

    What about a sales tax assessed at different per-item prices? So your Twinkie is taxed at 2%, your restaurant-served filet mignon at 3%, your iPad at 4%, your big-screen TV at 5%, your new car at 6%, your yacht at 20%?

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    • Mike says:

      Some states already do that. Necessities are tax-free when they are under a certain price. A lot of states have a tax exemption for the first $100 of an article of clothing. That is, you only pay tax on the portion of the item’s cost that exceeds $100.

      It’s not perfect because a designer t-shirt for $50 is still tax-free, whereas a business suit is surely going to be over $100.

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      • MW says:

        What do they do for a $1000 three piece suit? Is $100 exempt or $300?
        If $100, the shops will start to sell $500 suit jacket, $300 waistcoat, $200 trousers separately, despite the fact that they are sartorially useless in isolation. (Or worse, imagine expensive socks sold separately instead of as a pair.)
        If $300, what if the shop sells a $1050 ‘five piece suit’ with a cheap shirt and pair of socks, so as to claim $500 is untaxable?

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    • MW says:

      Such a scheme greatly increases compliance cost, as you need to track what is taxable at what rate, and also leads to arbitrary boundaries between categories. One example I heard (many years ago, might have changed or I might have misremembered) is that in Australia, food ingrediants are exempt from GST but ready-to-eat food is not, so unsalted peanuts and salt are both untaxed but salted peanuts are taxed. Similarly, is a book of game rules packaged with a couple of dice a game or a book? Is a cheap small plug-in electric motorcycle a motor vehicle or a toy? If a convenience store heats a packaged meat pie for you, does it become like the restaurant filet mignon at 3% rather than the twinkie at 2%?
      Perhaps the benefits will outweigh the costs, but you need to keep the costs in mind.

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  4. Brian Jarvis says:

    Ontario, Canada had a situation like this 15+ years ago. The provincial sales tax didn’t apply to purchases less than $4. Rather than buy two McDonald’s burgers or such, one would buy them as two separate transactions to duck the sales tax. As a student trying to save every penny, I used this tactic everywhere I could.

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  5. joe.no.tax.filing says:

    How about a mini-max flat sales tax. Every transaction of every kind would be subject to a tiny federal tax fee — no deductions or exemptions. The huge amount of economic activity in the U.S. could mean a tax of less than 1% would produce enough revenue to run the government. Such a tax would have been impractical before computerized accounting, but with almost all economic actions now going through banks and other financial institutions which already record the transactions, collection of taxes would be all but automatic. The need for an income tax and a corporate tax, with the attendant paperwork, would end. Those who engage in more financial activity — the rich — would pay more. Loopholes and special treatment, whether for a home mortgage or oil exploration, would all vanish. As on a highway or bridge, every user would pay the toll. Simple, equitable, efficient, understandable or so it seems to a non-expert. No doubt, however, what with this and that objection, it will never happen.

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