Wednesday, July 7, 2010

DWL and car taxes over time

DWL is the abbreviation for the mouthful economic concept: deadweight loss. Redistribution is potentially inequitable as it takes from one and gives to another. DWL is definitely inefficient-- as resources are moved from first-best to second-best uses.

From Mindy Belz in World...

a Dodge four-door touring sedan...a total price of $911.50, which included a state license fee of $3.35 but apparently no sales tax.

State sales tax seems to have kicked in when he purchased a DeSoto in 1947...a little over 1 percent. A Chevrolet Fleetmaster Cabriolet purchased the next year cost him...almost 2 percent.

...purchase price had more than trebled....coffers were trebling without the trouble of raising taxes, but apparently it wasn't enough: When he bought a Pontiac Star Chief in 1955...sales tax had risen to 3 percent...

Today my grandfather would pay 9.25 percent just in state sales tax to buy a new Chevy. His car-buying history is a small picture...

Economists call this deadweight loss: a doubling of the tax rate quadruples the economic cost to society of lost market activity. In other words, when taxes go up—income, sales, property, value added, or other—people simply drop their participation in the taxed activity. As one put it, "it is not value gained by government, but simply prosperity that is destroyed."


Post a Comment

Subscribe to Post Comments [Atom]

<< Home