August 12, 2014 at 6:35 pm #18391
Washington State has no personal income tax. Oregon has no general sales tax. It would seem that there is an advantage to living in Vancouver, WA, and buying goods and frequenting restaurants and bars across the Columbia River in Portland Oregon.
Then I thought, well, maybe there isn’t really a benefit since the owners of retail establishments in Oregon have to pay income tax. But then I remembered in Power & Market Chapter 4, Rothbard says “The first law of incidence can be laid down immediately, and it is a rather radical one: No tax can be shifted forward. In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer.” To me this means, specifically, that the income tax in Portland, OR cannot be shifted to the consumer (from Vancouver, WA.
However, Rothbard has a caveat. “It is true that a tax can be shifted forward, in a sense, if the tax causes the supply of the good to decrease, and therefore the price to rise on the market. This can hardly be called shifting per se, however, for shifting implies that the tax is passed on with little or no trouble to the producer. If some producers must go out of business in order for the tax to be ‘shifted,’ it is hardly shifting in the proper sense but should be placed in the category of other effects of taxation.”
I figure the application of this is that if the burden of the sales tax is actually higher in Portland OR than in Vancouver WA, at the margin it could result in fewer retailers per capita and fail to result in lower after tax prices than Vancouver WA.
It also seems a bit strange that two different after tax prices could exist in such close proximity but perhaps it is difficult to arbitrage except for expensive items where there is not tax on resales.
I’m going to be driving through this area this week, so will do some empirical tests, but wondering whether theory would suggest there is benefit to living in a state with no income tax and doing most consuming in a nearby state with no general sales tax.August 12, 2014 at 6:47 pm #18392
Correction: “I figure the application of this is that if the burden of the INCOME TAX is actually higher in Portland OR than the burden of the SALES TAX in Vancouver WA, at the margin it could result in fewer retailers per capita and fail to result in lower after tax prices than Vancouver WA.August 13, 2014 at 6:45 pm #18393jmherbenerModerator
Entrepreneurs are always arbitraging to take advantage of differences in prices. If prices were lower in states without sales taxes, then entrepreneurs would shift supply toward the higher priced state. The costs of production are not higher in the sales tax state because the sales tax is imputed backward to lower the prices of factors of production. Since it may be that entrepreneurs cannot pay less for materials, then wages would be lower.
These theoretical proposition are difficult to verify with superficial empirical evidence because the “other things equal” condition of the theory is rarely met in the world. Consider the following case, with which I’m familiar. Pennsylvania has no sales tax on clothing. Grove City, Pa. has a large Prime Outlet mall with many name-brand clothing stores. The prices for clothes in these stores are lower than normal retail. But, the reason is not that Rothbard’s analysis is wrong and the lack of sales tax permits lower costs of production and thus, lower prices. It’s because the clothes sold at Grove City Prime Outlets are “seconds,” i.e., clothes returned to other stores and repaired to be resold.
You would have a similar difficulty in empirical investigation of prices at restaurants in the two different states. If prices are lower in Portland, it might be because Vancouver is a more desirable location than Portland and not because Vancouver has a sales tax and Portland does not.August 18, 2014 at 10:54 am #18394
Thanks for the explanation Jeff! The anecdotal evidence from my trip is consistent with the theory that a lack of sales tax will not necessarily result in lower prices. I visited a McDonald’s in Vancouver WA and also one in Portland OR, and observed the after tax prices for a “Big Breakfast” at each.
Vancouver WA after tax price = $4.11 = $3.79 big breakfast + $0.32 sales tax
Portland OR after tax price = $5.05 = $5.05 big breakfast + $0.00 sales tax
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