Saturday, July 28, 2007

The inefficiency of tax holidays

The [Massachusetts] House just approved a "tax holiday" in August. As a manager of a retail showroom in Weymouth, I have seen our business consistently hurt by this policy...

Our sales virtually die as soon as the Legislature starts talking about a tax holiday. Consumers won't buy when they think that they save 5 percent in a few weeks. Unless I'm willing to pay the customer's sales tax out of our margin dollars for half the summer, our sales volume plummets.

Then "tax weekend" comes, and I have to pay my staff overtime to work all weekend to try to recoup some of that loss. While the receipts for those "tax free" days are admittedly high, they do not touch the losses caused by consumers holding off on making purchases.
--Chris Sands, Boston Globe, on the inefficiency of tax holidays. Econ 101: the deadweight loss of a tax increases with the square of the tax rate. So for a given average tax rate, it's better to have a tax that is uniform on a broad base, rather than a tax that is high on some items and low on others.

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