Goods Versus Services: A Call for Sales Tax Neutrality

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In the inaugural issue of Marginal Impact last June, I criticized state and local sales taxes for taxing a significant number of business purchases. Even as I said that sales taxes were overbroad along that dimension, I also observed that they were overly narrow along another dimension, because they exempted a significant fraction of consumer spending. I elaborate on that point in this article and an upcoming article.

The typical state sales tax has two major features that prevent it from being a broad-based tax on consumer spending. First, the typical sales tax exempts, or provides preferential rates for, groceries and other necessities. Second, the typical sales tax applies primarily to sales of goods and exempts many types of consumer services. The two features may overlap for some items; for example, housing and healthcare may be exempt from sales tax because they are necessities or because they are services or for both reasons. Nevertheless, the two policies require separate analysis.

The exemption of necessities from sales tax is intended to serve the legitimate goal of easing the tax burden on low-income households. As I will explain in an upcoming article, this policy turns out to be an ineffective and undesirable way to promote that goal. Nevertheless, the policy clearly has a coherent motivation. In contrast, the failure to tax consumer services, which is the topic of this article, has no defensible policy basis, despite its venerable pedigree in the history of sales taxation. The disparate treatment of goods and services has been uniformly condemned by tax policy scholars because it creates economic inefficiency and complexity.

Alan Viard is a resident scholar at AEI.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

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