Tuesday, July 1, 2008

Sales tax will mean trouble for Chicago

Last February, the Cook County Board voted to raise the sales tax to 10.25%. The increase went into effect yesterday giving Chicago the highest sales tax rate in the nation -- higher than New York City and Los Angeles. Supporters of the tax hike argue that the increase will bring in an additional $440 million. But is this a realistic estimate? Since higher taxes create a disincentive, I would bet against that optimistic estimate. That's because consumers will take their business elsewhere, particularly when planning to purchase big ticket items such as appliances, furniture, electronics and professional services.

As Old Town resident David Ashamalla told CBS News, "It's kind of frustrating. I go to Best Buy or something, and high-priced electronics – it adds like $20, $30 to a TV I bought."

Every textbook used in every college public finance class recognizes two overriding principles of taxpayer behavior: (1) Higher tax rates exert a combination of positive and negative effects on economic behavior. And (2) the negative effects exceed the positive effects insofar as it is easy for taxpayers to avoid paying the higher taxes and insofar as the tax takes a bigger bite out of taxpayer income or buying power.

Moreover sales taxes are regressive. That is to say they fall more heavily on the poor who must pay more of their income for high taxed goods and services. While the revenue estimates are open to question, there's no doubt that retail sales will be rough in Chicago and Cook County. Lake County, Indiana get ready for a wave of Chicago shoppers!

1 comment:

Anonymous said...

Also in Chicago their is a special business zone where the rate is even higher. There really has to be better teaching of finance and economics at an early stage. Those citizens get what they elect, but again its all Bush's fault anyway.

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