Friday, July 11, 2008

Sales Tax will Mean Trouble for Chicago, Part II

Kate Sheehan has already explained one obvious problem with Cook County's (IL) decision to increase its sales tax to 10.25%. However, economists know that there are always unforeseen economic effects to government policy. Could Chicago's sales tax have an unseen, harmful effect on its servers in the restaurant industry?

A reader made this point at the new Nudge blog written by Harvard Law Professor Cass Sunstein and University of Chicago economist Richard Thaler, who coauthored a book by the same title.

A common practice for restaurant tipping is that a diner uses the sales tax to determine the waiter's tip. For example, with a 5% tax in Massachusetts, diners generally triple or quadruple the sales tax to pay a waiter the standard 15-20% tip. The Nudge reader, who generally doubled the sales tax to figure out his waiter's tip, said he would reconsider this practice after the sales tax increase would raise the tip to a higher level than usual. The reader correctly notes that this may reduce a typical waiter's earnings with careful consumers who analyze their bills. As a result, servers will lose some of their income and purchasing power.

Not surprisingly, this is another example of a government policy that will produce unanticipated effects that harm the local economy.


Anonymous said...

Isnt Beacon HIll the leading advocate for the Fairtax-- which is essentially the highest national sales tax -- or any sales tax -- on earth?

Anonymous said...

How about people go to stage two on these issues. What is government spending the money on in the first place!!! So frustrating that government keeps taking and taking yet not enough peopl eask why are they taking to realize how insane their argumnets are......

John Macek III said...

If the FairTax were adopted, the national income tax would be abolished. Taxpayers would be no worse off, some might even be better off. An increase of the sales tax, without a concurrent decrease in other taxes, represents a loss in income for consumers. This is what Chicago did.

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