Our dead weight
Tracing the cost of taxation one car purchase at a time
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On their honeymoon my grandparents drove a black 1930 Model A Ford sport coupe, and my grandfather became an unrepentant car buff ever after. In 1935 he bought a Ford Tudor, and one year later-according to the bills of sale (nearly all of which he kept until his death at age 100)-he traded it in for a Dodge four-door touring sedan.
The Dodge had Duplate glass and the "DeLuxe Accessory Group A" package (including optional radio and heater). It came to a total price of $911.50, which included a state license fee of $3.35 but apparently no sales tax.
State sales tax seems to have kicked in when he purchased a DeSoto in 1947. He paid $22 tax on a purchase price of $1,930-a little over 1 percent. A Chevrolet Fleetmaster Cabriolet purchased the next year cost him $38.74 in sales tax, almost 2 percent on a purchase price of $1,950 (he was by now paying extra for not only the radio but also white sidewall tires, chrome gravel shields, and a hood ornament). In 1950 he still paid about 2 percent sales tax on the purchase of a Chevrolet Styleline four-door sedan and in 1954 on the purchase of a new Olds 98.
At this point, in the nearly two decades my grandfather had been car buying, the tax rate had hovered at 2 percent or less but his purchase price had more than trebled. I imagine the joy of the state tax collectors, whose coffers were trebling without the trouble of raising taxes, but apparently it wasn't enough: When he bought a Pontiac Star Chief in 1955 for $3,286, sales tax had risen to 3 percent ($98.59). But my grandfather was at that point a prototype of 1950s prosperity: A self-employed survivor of both depression and world war, he had not one but two thriving businesses and three children of driving age. Like many American families then, wheels ruled, and taxes remained low.
But in 1956 Congress passed the law creating the interstate highway system. It included new taxes on fuel, automobiles, trucks, and tires for what was projected to be a $25 billion system built over 12 years. (It would cost over $114 billion and take 35 years to complete.) Invoices for the next cars my grandfather purchased-two in 1961-had a preprinted line for "federal tax," but the dealers rolled it into the purchase price.
Today my grandfather would pay 9.25 percent just in state sales tax to buy a new Chevy. His car-buying history is a small picture of our overall state of progressive taxation. It's no idle talk, this tax burden we are placing on our future grandchildren. Consider the burden on this granddaughter: For a family car equivalent to the 1961 Chevy station wagon my grandfather bought for $2,500 (about $18,000 in today's dollars), I am likely to pay well over $25,000, and then to pay a tripled tax rate-more than 10 percent federal and state-on top.
Economists call this deadweight loss: a doubling of the tax rate quadruples the economic cost to society of lost market activity. In other words, when taxes go up-income, sales, property, value added, or other-people simply drop their participation in the taxed activity. As one put it, "it is not value gained by government, but simply prosperity that is destroyed."
Few of us consider our tax rate, especially sales tax, but it's perhaps not insignificant that I haven't purchased a new car in 10 years, and after 1961 my grandfather purchased only two cars, both used. Americans have experienced decades of deadweight loss, well diagnosed as lost productivity by the Hopper brothers in their book The Puritan Gift. Yet tax cuts enacted under the Bush administration expire in six months (Jan. 1, 2011), and some increases will be dramatic at the federal, state, and local level. The tax on stock dividends will go from 15 percent to 39.6 percent. Expect to hear that ending these "tax breaks" is responsible, but the plain fact is that a 1 or 2 percent increase in the rate of U.S. productivity would do more to fill tax coffers than tax increases ever will. Email Mindy Belz