Problem Set #6 Answer Key

1. The sales tax treatment of Internet and Mail-order purchases is controversial. a. Think about the products you have purchased using the Internet or by mail order in the recent past and calculate roughly how much you spent. Any number of answers (ex. $300 for books on Amazon). b. Which of the vendors have nexus? Does your state have a use tax? Vendors that have a physical presence in the state in which they do business, have nexus in that state. Utah does have a use tax, or a tax on purchases made outside of one’s state of residence. c. Did you pay the use tax on taxable items? Why or why not? Yes or No. Variety of answers. d. How much did the opportunity to avoid sales tax influence your decision to purchase over the Internet or by mail order? Variety of answers. e. Do you think that the companies that sell through the Internet or by mail order should be required to collect state sales or use taxes on purchases? If not, then what other methods might states use to collect these taxes? Variety of answers Other methods could be to appeal to the Federal Government to enforce online retailers to pay applicable sales taxes.

2. The following purchases and sales provide the basis for VAT calculations: a. Calculate the value added at each stage of the production. b. If the VAT has a 20% rate, calculate the tax remitted by each producer. c. Explain how a general sales tax on the final product could achieve the same amount of revenue as the VAT. d. Explain why the VAT achieves efficiency in administration and accountability.

a. Calculate the value added at each stage of the production. ProducerPurchasesSalesValue Added Farmer$ -$ 400 Miller$ 400$ 700$ 300 Baker$ 700$ 950$ 250 Grocer$ 950$ 1,000$ 50 Total$2,050$ 3,050$ 1,000

b. If the VAT has a 20% rate, calculate the tax remitted by each producer. ProducerPurchasesSalesValue Added VAT Tax Rate Tax Remitted Farmer$ -$ %$ 80 Miller$ 400$ 700$ 30020%$ 60 Baker$ 700$ 950$ 25020%$ 50 Grocer$ 950$ 1,000$ 5020%$ 10 Total$2,050$ 3,050$ 1,000$200

c. Explain how a general sales tax on the final product could achieve the same amount of revenue as the VAT. For a general sales tax to achieve the same amount of revenue as the VAT, the tax would need to be 6.56% ($200/$3,050) if the tax were leveled at each stage of the production process. If the tax were paid only on the final $1000 by the grocer, then the 20% tax rate would give the same revenue as the VAT. d. Explain why the VAT achieves efficiency in administration and accountability. When using the credit-invoice method, a VAT tax is applied to the full value of the product. Afterwards the firm is given a credit for the value of the goods it purchased from the previous stage of production upon providing proof with an invoice. By using this method, tax compliance is built into the system because of the ease of administration (taxing on the full value of the product).

3. Use FRED to obtain data for total general sales and gross receipts taxes for the US (USSALESTAX) and Utah (UTSALESTAX). Compare the trends and growth rates for the taxes. How did the Great Recession impact state and local governments. Utah seems to follow the same trend as the other states in the US. The Great Recession actually decreased the amount of sales taxes collected from year to year.