A Tale of Sales Taxes, a.k.a. "But It's Only 7.75%... (in Nevada)"
By Tom Hurst, 4 June 2008
Among numerous taxes (both direct and indirect) and "user fees" - the sum total of which rises to about 52% of the average American's income - people in most states have become used to paying a modest sales tax when they buy anything and everything. It doesn't seem a huge tax except when buying big ticket items, but by the same token it's not a benign tax either because it's ever-increasing: a quarter percent here and there to fund this and that, and lo' and behold ten years later the sales tax has risen a couple of percentage points. Nevertheless - perhaps because it's considered such a small amount - it usually goes totally un-noticed as people spend their hard-earned dollars. After all, on a dollar it is but a few pennies. In fact, at the cash register the average person is far more likely to joke about "the governor's share" than get angry about the theft of their money. In my mind, however, a penny saved is a penny earned, so I ask, are sales taxes really so small that we shouldn't worry about them? Let's take a look at a few numbers - and I'll try to keep it simple here - to help us decide.
First, exactly what sales tax rate do people pay? Well, in 2008 the combined average of state, county and city sales taxes range from a low of 1.45% in Alaska to a high of 9.4% in Tennessee; excluding the four states that have no sales tax (but substantial income taxes to compensate), the average is about 6.55%. In my home state of Nevada it's 7.75% (hence the title of this article), and that's the number I'll use in my projections.
Next we need to know how much people earn. Though incomes are always rising, especially if one works for the government, I'll use the latest (2004-2006) U.S. Census Bureau data on median (a sort of average) annual household income. There, median income ranged from a low of $35,261 in Mississippi to a high of $64,169 in New Jersey; the average across the United States was $47,790. The number I'll use in my projections is that from Nevada, $50,819/year. [As an aside, the median salary for a federal government "worker" is over $106,000/year, and that of county workers about $90,000. It makes one wonder who is the master and who is being served, doesn't it?]
Now, to see the impact of sales tax on your life, we need to make a few assumptions. First, realize that the 52% overall average tax rate I mentioned earlier is a complex composition of all sorts of both direct (sales, income and property taxes primarily) and indirect taxes (the inflation tax, vehicle registration fees and such), and that a surprisingly large amount of tax is hidden in the price of things that we buy as taxes already paid by the various companies (that simply pass them on to us as a cost of doing business). So, the amount of our "take-home pay" is really the proper starting point to estimate what we have to spend in stores - and hence how much sales tax we pay. Now, if one applies basic IRS income tax rates to the median Nevada household income of $50,819, the average person takes home about $3000/month (and hundreds more per month if they have deductions created by having children or a mortgage). Removing both food expenditures (on which no sales tax is paid) and a mortgage payment or rent (on which no sales tax is paid, though property tax is) leaves probably $1000/month that will (when spent) incur sales tax.
So, there it is. A typical Nevadan will pay a 7.75% sales tax on $1000/month; that works out to a total of $930 paid to the state each and every year of their life. Still, one says, that's a small number. True, perhaps, but the rub is to ask oneself what one would have done with that money if it were not stolen by government. Many among us might very well have saved or invested that money, and when that is done one must necessarily consider the magic of compounding interest and it's profound impact on the future value of one's investment. Indeed, in a very real sense the government does not steal just $930/year from us, but all of the future interest and income it might have earned. Normal investments are often evaluated this way in that the true cost of paying up-front brokerage sales commissions, loads on mutual fund purchases and such is not just the amount paid at the time of the transaction, but rightly includes the future earnings on that money that one forfeits. Even if one just bought goods or services instead of investing, many of those items would be enjoyed for years to come, so would still provide a sort of income, albeit one not easily quantified.
In any case, having established that the future income that one's money might earn is a legitimate "cost" of paying a sales tax, let's see what happens to that $930/year when we compound it over time. Starting very simply, assuming an average 8% return on a single $930 investment over, say, 40 years, one would have upon retirement $20,200 or so. Considering that is the amount generated by just ONE year of sales tax that the state steals from you, I expect you can imagine that a lifetime of not paying sales tax would earn a great deal more - and that's true in spades. In fact, calculations based on a few simple assumptions show that if one's $930 was each year invested instead of paid in sales tax, the typical Nevadan would end up with an additional $300,000 or so at retirement! Let me guess, that modest sales tax you joke about at the cash register doesn't seem so innocuous now, does it? A whopping $300,000 is potentially the true value of money that government takes from you. In reality, the actual amount would vary greatly for different people because a proper calculation is both rather personal and rather more complex than I make out here. Nevertheless, the scale of the total for an average Nevadan would be at least on the order of several hundreds of thousands of dollars, and perhaps several times that.
Now, knowing all of the above, I would ask you two key questions. First, just how much better off would you be if you had that money in your retirement account? And, second, do you really think that you could possibly receive $300,000 worth of services from the state government? Well, personally, I think the answer to both is beyond obvious. For one thing, there are very, very few people anywhere who would not be far better off with an extra few hundred thousand dollars in their accounts when they retire. Indeed, that amount of money is more than the total that many currently retire on, and in old age money buys one both security and the dignity of not being a burden on relatives or society. As far as the alternative of getting hundreds of thousands of dollars worth of services from the government - and that is what one's choice really is, $300,000 at retirement, or 40 years of government's dubious "services" - realize that the sales tax is but a small part of what we pay for government throughout our lives. Simply stated, government gets plenty already and doesn't need our sales tax - they just want it. And that is the nature of all government, to perpetually increase its power and wealth at our expense. In any case, it is my observation that most people actually use shockingly few government services, and certainly not hundreds of thousands of dollars worth. If you disagree, I'd ask you to sit down and write out a list - I guarantee you will be surprised at how little government does for you. Further, the little that it does do would probably be done better and cheaper by the private sector. The reality is that government is for the most part just a massive waste of money - money that would produce real wealth if left in the private sector. In fact, it goes beyond that in the sense that the government is far more likely to be doing (bad) things *to* me, instead of (good) things *for* me.
So, the bottom line is that instead of having a lifetime of government waste and intrusion courtesy of the sales tax money it steals from everyone, one would instead have a decent-sized retirement account. Indeed, considering the scale of the money lost compared to what it would have been wasted on, I think the reality is that the Tale of Sales Taxes really turns out to be a nightmare for most people, not the utopia that government promises. And we haven't even discussed the cost (passed on to us in the price of products and services) of having businesses collect sales tax, or if it is even constitutional to make them de facto tax collection agents for the government. Now, isn't it high time we tell big government that enough is enough? After all, it's evidently a plethora of small taxes that have allowed government to get so big. If we were somehow paid our full salary, and then individually forced to remit more than half of it to government each month, I'm quite certain that the tyrants and wastrels could not get away with stealing so much of our income. People would rightly revolt. So - and don't think I'm advocating higher sales here - perhaps the one paradoxical evil of sales tax is that it's so small! But, small or large, we should eliminate it, period.
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[Other articles may be accessed via the Archive page.]