Wednesday, October 18, 2006

Subsidies for centralization

I've been reading much of Kevin Carson's work on how government policies provide subsidies for economic centralization (highways, for example). Now that I've become aware of this tendency, I can see examples everywhere.

For example, I recently bought a used car in PA and now I have to pay sales tax. It's stupid enough that I have to pay sales tax on a used car (the original owner already paid the tax for the car), but the situation is made worse in that the seller faces several hundred dollars in extra taxes because he decided to sell the car to me rather than trade it in to the dealership where he bought his next car.

According to PA-DMV FactSheet on "BUYING OR SELLING YOUR

Pennsylvania sales tax is 6% (7% City of Philadelphia and Allegheny County residents) of the purchase price or the current
market value of the vehicle.

If a motor vehicle is taken by the seller as a trade in, the tax is imposed upon the difference between the purchase price of the
motor vehicle purchased and the value of the motor vehicle taken as a trade in by the seller.
To be explicit, let's use some numbers. Let's assume that the used car is worth $10,000 and there's a 6% tax on sales. The ultimate buyer of the used car has to pay $600 in tax regardless of whether he buys it from the previous owner, or buys it from a dealer after trade-in.

The difference (i.e. distortion) affects the previous owner, who has to pay an extra $600 in taxes on her new car if she sells the old car for cash to another individual rather than trading it in to the dealership. That's a considerable incentive to funnel business thru the dealers--i.e. whoever has gathered enough capital that they can keep cars in stock and trade them for each other, rather than using cash.

I'm not suggesting that this law was designed with the intent of aiding dealers. While that is plausible, it is also plausible that this unfairness arises from some technicality in how taxes are assessed (though I can't imagine why that would be--there are various ways to estimate the value of the trade-in). However, we can be sure that if the unfairness ran the other way (favoring the small guy over the big guy), then the car dealership trade-group would be applying a lot of pressure on government officials to "fix" the problem.

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