Question

1. The following was heard on a primetime news cast. "The government has just increased the sales tax. This is unfair to consumers, particularly the poor, because budgets are already stretched far enough. It would have been much more fair for the government to have levied an excise tax on firms as a way of making big business give back to the community." Explain why the person's argument is more than likely incorrect. Be sure to discuss whether the person has over or understated the effect of the tax on consumers and producers.

Answer 1

This statement can be considered incorrect because the person is not taking into account what the actual effect of the sales tax and the excise tax is on consumers. The excise tax is a tax applied at the moment of manufacture, not at the moment of sale. On the other hand, a sales tax is applied to a product at the moment of sale. However, if companies have to pay an excise tax, they are likely to raise the prices of their products, which could end up having the same effect on consumers as the sale tax. The person has most likely overstated the effect of the sales tax, while understated the effect of the excise tax.