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Show CHAPTER II THEORY OF USER FEES ADD- ON FEE ( EXCISE TAX) Introduction Since the user fees examined in this study are a type of excise tax, the theory on excise taxes is relevant. " Excises" are of two types, a " unit tax" for which the base of the tax is the physical amount of the resource being taxed and an " ad valorem tax" for which the base is the value of the resource. A broad based " ad valorem" tax is generally known as a " sales tax." Price Effect The impact of excises on price is a very important consideration in evaluating their feasibility and one which economic theory addresses in detail. If no account is taken of how the money raised by the tax is spent, then the impact depends on who pays the tax. It could be passed along to the consumer in the form of higher prices, absorbed by the producer in reduced profits, or shifted back on to the resource owners in the form of lower wages, rents, royalties, interest charges, etc. The way the tax burden is shared among these three groups depends on the market structure for the industry and the nature of demand. Generally, speaking the more important and essential the good, the more likely the tax will be passed along to the consumer in the form of higher prices; however, the ability to pass the tax along is influenced greatly by market structure. Only in the case of constant production costs and a competitive situation can the tax be passed along fully to the customer. The geometric and algebraic proofs of these statements are found in Appendix F. In monopoly situations, the prices being charged before the tax are already inflated by monopoly profit. The price increase associated with a tax in this circumstance can be expected to be about one- half of what it would be in the competitive market. More of the tax would be absorbed by the producer out of profits. In general, an excise will be only partially passed along to the customers, and only that part which is passed along will reduce consumption. Unit Tax and Ad Valorem Tax Compared A unit tax is based on only one variable-" output" while an ad valorem tax is based on two-" output" and " price." An ad valorem tax will generate larger revenues than a unit tax when demand is high and lower revenues than a unit tax when demand is low. If the purpose of the tax is to curtail consumption of the product, then the obvious choice is the ad valorem tax since it will lead from a similar initial burden to a higher price and a smaller output and use. Administrative Considerations The broader the base of an excise tax, the simpler it would be to administer. It is easier to tax all boats than just those used for recreational purposes. The tax is more likely to be passed along to the consumer since the broader base would undoubtedly mean more firms would be involved. Excise taxes also are subject to geographical considerations. Local excise taxes easily can be avoided by making purchases elsewhere. The opportunity for tax avoidance is reduced as the geographical range of the tax is increased. Imposition of the Tax An excise tax can be levied at the manufacturing, wholesaling, or retailing level. The advantages at the retailing level are several. It imposes the tax on the actual selling price so as not to discriminate against the means of production and distribution. Lower rates can be used for the same amount of revenue than at the other levels. It also avoids the problems of tax pyramiding in which the tax is imposed more than once within the productive and distribution processes. The fact that the tax is not hidden in the price encourages uniformity of treatment of customers. The problem of how to handle taxed inventories is removed. The major disadvantage of the retail excise is that the collection process increases the number of taxpayers substantially and makes auditing more costly. Other Considerations Excise taxes could in some cases alter the quality of the products produced and the size of market areas if the tax is included in transportation costs. Also, if the tax is hidden, customers may confuse the tax with general inflation and their demand curves will shift 9 |
