Beyond The 9 to 5: The Rise of Side-hustles

by Julie Johansson | Jul 17, 2023 | Uncategorized

In the land of opportunity, the American dream has traditionally been defined by a single, full-time job that provides the income and benefits necessary to sustain a comfortable lifestyle for a family. However, with shifts in economic realities and growing income inequality, many, maybe even most, Americans find that this traditional employment model is insufficient. The rise of the “gig economy” and the increasing popularity of side-hustles serves as a testament to the changing landscape of work in the United States.

A side-hustle is any employment undertaken in addition to one’s full-time job, intending to supplement income. It can take many forms, from freelance work in one’s area of expertise to selling handmade goods online, driving for a rideshare service, or renting out a room on Airbnb. These endeavors allow people to leverage their skills, pursue passions, and ultimately increase their earnings.

A complex interplay of factors drives the increasing prevalence of side-hustles and multiple jobs in America. Stagnant wages, rising living costs, the inequitable distribution of the burden of paying for government and the services it provides, the burden of student loan debt, and lack of sufficient benefits from primary employment have all pushed many Americans to seek additional income streams. Furthermore, the uncertainty of the job market, often influenced by economic recessions or global events like the COVID-19 pandemic, contributes to the need for a diversified income as a form of financial security.

While side-hustles can offer increased financial flexibility, they also underscore a deeper issue: the struggle for many to make ends meet with traditional employment. In a society marked by prosperity and abundance, the need to work additional jobs points to systemic issues that require attention from policymakers, employers, and society. The future of work in America may hinge on how these challenges are addressed.

Why Aren’t Americans Making Enough Money?

The issue of Americans not making enough money to keep up with inflation, the unjust distribution of the tax burden, and the changing economy is multifaceted and influenced by several factors. Here are some key reasons:

1. Wage Stagnation: Despite overall economic growth, wages have remained relatively stagnant for many workers. Wage stagnation refers to the lack of significant wage growth over time, leading to a decline in real wages when adjusted for inflation. This phenomenon has been observed across various industries and job levels, and it can be attributed to factors such as increased automation, globalization, weakened labor unions, and shifts in the bargaining power between employers and employees.
2. Growing Income Inequality: Over the past few decades, income inequality has risen in the United States. The top earners have experienced significant income growth, while wages for middle and lower-income workers have remained relatively stagnant. This inequality can be attributed to several factors, including changes in the labor market structure, the decline in union membership, technological advancements, and certain policies that have favored the wealthy.
3. Changing Job Market Dynamics: The job market has experienced significant shifts due to technological advancement, globalization, and changing consumer demand. Automation and advancement in artificial intelligence have displaced certain jobs while creating demand for more specialized skills. This has left some workers facing unemployment or the need to transition into different industries, which can impact their earning potential.
4. The decline in Worker Benefits: In addition to stagnant wages, there has been a decline in certain worker benefits. Employer-provided benefits, such as healthcare coverage, retirement plans, and paid time off, have become less comprehensive and accessible for many workers. The increasing burden of healthcare costs and reduced retirement security can contribute to financial strain and a sense of not keeping up with the changing economic landscape.
5. Rising Costs of Essential Expenses: Essential expenses, such as housing, healthcare, education, and childcare, have outpaced wage growth for many Americans. These rising costs, coupled with stagnant wages, can lead to a situation in which individuals struggle to keep up with inflation and maintain their standard of living.
6. Globalization and Outsourcing: Globalization has led to increased competition in the labor market, as companies can outsource jobs to countries with lower labor costs. This has put downward pressure on wages for certain industries and occupations, particularly those that can be easily outsourced or automated.
7. Policy and Regulatory Factors: Government policies and regulations can also affect income disparities and wage stagnation. Tax policies, labor laws, trade agreements, and minimum wage regulations, among others, can impact income distribution and influence workers’ earning potential.

It’s important to note that these factors interact and influence each other, creating a complex economic landscape. Addressing the issue requires a comprehensive approach that includes policies aimed at promoting equitable wage growth, strengthening worker protections, investing in education and skills training, change the tax systems in our country, and ensuring access to affordable essentials like healthcare and housing.

The Rise of the Side-Hustle

The rise of the side-hustle refers to the increasing trend of individuals pursuing additional sources of income or starting small businesses alongside their primary employment. During the pandemic, side-hustles became increasingly prevalent as individuals sought additional sources of income and financial stability amidst widespread job losses and economic uncertainty. With lockdowns and restrictions limiting traditional employment opportunities, people turned to their skills, creativity, and online platforms to start small businesses or offer freelance services. However, while side-hustles provided a lifeline for many, the challenge of keeping up with inflation remained. As living costs and essential expenses continued to rise, stagnant wages and limited access to benefits made it difficult for people to maintain their standard of living. 

Side-hustles have gained popularity in recent years due to various factors such as economic uncertainty, technological advancements, and changing attitudes toward work. Some key aspects of the rise of the side-hustle:

1. Economic Factors: In many countries, the job market has become increasingly competitive, and traditional employment may only sometimes offer the financial security or fulfillment that individuals desire. Side-hustles provide an opportunity to supplement income and create a financial safety net.
2. Technological Advancements: The proliferation of the internet and digital platforms has significantly lowered the barriers to entry for starting a business or offering services. Online marketplaces, social media, and freelance platforms have made it easier for people to advertise their skills, products, or services and reach a global customer base.
3. Flexibility and Autonomy: Side-hustles allow individuals to take control of their work schedules and pursue their passions. People often engage in side-hustles outside their regular working hours, which provides the flexibility to balance personal and professional commitments. This flexibility can also appeal to those who want to explore entrepreneurship but are not ready to leave their full-time jobs.
4. Diverse Income Streams: Relying solely on a single job or income source can be risky in uncertain economic times. Side-hustles offer an opportunity to diversify income streams, reducing dependence on a single source of earnings. This diversification can help individuals build financial resilience and pursue multiple interests simultaneously.
5. Pursuit of Passion and Personal Development: Many side-hustles stem from individuals pursuing their hobbies, talents, or interests. It allows people to turn their passions into income-generating activities and provides a creative outlet outside their main employment. Side-hustles also offer opportunities to learn new skills, gain entrepreneurial experience, and explore different industries.
6. Entrepreneurial Mindset: The rise of the side-hustle reflects a shift in attitudes towards work. More people are embracing an entrepreneurial mindset and seeking ways to take ownership of their careers and financial futures. Side-hustles provide a low-risk entry point into entrepreneurship, allowing individuals to gradually test their business ideas and build their entrepreneurial skills.
7. Gig Economy and Freelancing: The growth of the gig economy and freelance work has contributed to the rise of side-hustles. With the increasing demand for flexible, project-based work, many individuals are leveraging their skills and expertise to offer specialized services on a freelance basis, either as a complement to their regular job or as their primary income source.

The rise of the side-hustle reflects a changing landscape of work, where individuals are looking for additional income, flexibility, and opportunities for personal and professional growth. While side-hustles can offer numerous benefits, it’s important to consider factors such as time management, potential conflicts of interest with one’s primary employment, and legal and tax implications when embarking on such endeavors.

Why People Still Need Side-Hustles 

Side-hustles might have served as a temporary solution, but now we are seeing more and more people needing to keep their side-hustles or work multiple jobs JUST to make ends meet. The need to maintain multiple jobs and side-hustles is due to several factors:

1. Insufficient Income From Primary Employment: In many cases, the income from a primary job may not be enough to cover all living expenses. Low wages, limited job opportunities, or high living costs can contribute to financial strain. Side-hustles offer an additional source of income to bridge the gap between earnings and expenses.
2. Rising Costs of Living: The cost of housing, healthcare, education, and other essential expenses continues to increase in many parts of the world. Even with a regular job, individuals may struggle to keep up with these rising costs. Side-hustles provide an opportunity to earn extra income and alleviate financial pressure.
3. Debt and Financial Obligations: Many have financial obligations such as student loans, credit card debt, or mortgages requiring regular payments. Side-hustles can help individuals generate extra income to pay off debts faster, avoid late payment penalties, or achieve financial goals.
4. Unpredictable Work Situations: The nature of work has become increasingly uncertain in some industries. Companies may downsize, restructure, or implement cost-cutting measures, leading to layoffs or reduced hours. Having a side-hustle provides a cushion of financial stability during job insecurity.
5. Flexibility for Unpredictable Lifestyles: Some individuals have personal circumstances that require flexibility in their work schedules. This includes caregivers, parents, students, or individuals with health conditions. Side-hustles allow them to work on their terms and accommodate their unique situations while still earning income.
6. Pursuit of Financial Goals and Aspirations: Side-hustles can be a means to achieve specific financial goals or aspirations. Whether saving for a down payment on a home, funding a dream vacation, starting an investment portfolio, or paying for further education, the extra income from a side-hustle can accelerate progress toward these goals.
7. Opportunity for Personal and Professional Growth: Side-hustles often allow individuals to explore their passions, develop new skills, and gain entrepreneurial experience. People may engage in side-hustles for financial reasons, personal fulfillment, and long-term career development.

It’s important to note that while side-hustles can help individuals make ends meet, they also require time, effort, and careful management. Balancing multiple commitments can be challenging, and individuals should assess their capacity and prioritize self-care to avoid burnout.

Are Freelancing and Side-Hustles Actually Even Lucrative? 

While side-hustles are becoming necessary in America, they aren’t always the best solution. Being a freelancer, a small business owner or a freelancer is hugely expensive. You can expect to pay double taxes because a traditional employer isn’t helping you match your taxes like in a traditional W2 job. There is so much work that goes into side-hustles. It is great to have freedom of schedule, but that can also set you up to work every single day and at all hours, especially when your side-hustle is a work-from-home job. It’s definitely not all sunshine and rainbows and being able to pocket and save tons of cash. Here are just some of the many concerns that come along with side-hustles:

1. Increased Tax Rates: In some jurisdictions, the self-employment tax rate can be significantly higher than traditional employment rates. In the US, for example, as of my last update in September 2021, self-employed individuals must pay both the employer and the employee portion of the Social Security and Medicare taxes. This means they might pay up to 15.3% (12.4% for Social Security and 2.9% for Medicare) on their net earnings from self-employment.
2. The complexity of Tax Compliance: Unlike traditional employees, freelancers and those pursuing side-hustles have to deal with a lot more complex when it comes to tax compliance. They are responsible for keeping track of all their business income and expenses, calculating, and paying estimated taxes quarterly, and dealing with complex tax forms come tax time. Some people doing side-hustles had no idea they had to report that to the IRS. The IRS lets no one slide. So many people have shared how they ended up owing substantial amounts of unexpected taxes on social media. Freelancing, small businesses, and side-hustles don’t come with a clear-cut manual on how everything needs to be operated and what the standards are. 
3. Lack of Benefits: Traditional employees often enjoy health insurance, retirement contributions, and paid vacation time. On the other hand, freelancers and those pursuing side-hustles typically have to provide these for themselves, which can be costly and time-consuming.
4. Instability of Income: Income from side-hustles and freelance work can be highly unpredictable. Unlike traditional employment, where you receive a regular salary, your earnings as a freelancer can fluctuate greatly from month to month, making budgeting and planning difficult.
5. Cost of Doing Business: Freelancers often have to bear the full cost of doing business, including costs for equipment, software, marketing, and professional services like accounting or legal assistance. These costs can add up and significantly reduce net earnings.
6. Lack of Legal Protection: In many countries, labor laws and protections that apply to traditional employees do not extend to freelancers or those with side-hustles. This can leave these individuals vulnerable to exploitation or unfair business practices.

While there are certainly challenges and drawbacks to having a side-hustle or freelancing, many people find that the benefits – such as autonomy, flexibility, and the potential for higher earnings – outweigh the negatives. It’s also worth noting that resources and strategies can help mitigate these disadvantages, such as tax planning, purchasing individual health insurance, and building an emergency fund to buffer against income fluctuations.

Consequences of Working Multiple Jobs

Burnout from working multiple jobs or maintaining a main job and a side-hustle can be a significant issue for many individuals. It refers to a state of chronic physical and emotional exhaustion, often accompanied by feelings of cynicism and detachment from work. This condition can manifest due to various factors related to having multiple jobs or maintaining side-hustles. Here are some aspects of how burnout can occur:

1. Extended Hours: One of the most straightforward reasons for burnout is the number of hours worked. Working multiple jobs or maintaining a side-h
2. ustle on top of a full-time job means longer work hours, often without adequate rest. This can quickly lead to physical and mental exhaustion.
3. Lack of Downtime: Humans are not designed to be “on” all the time. We need downtime to relax, recharge, and pursue hobbies and interests outside of work. If all your time is spent working, recovering from the day’s stress can be hard.
4. High-Stress Levels: Balancing the demands of multiple jobs can be extremely stressful. This is especially true if there is a high degree of job insecurity or if the work is particularly demanding or challenging. Chronic stress can have severe health impacts and significantly contribute to burnout.
5. Mental Health Issues: Working too many hours and only making ends meet can leave people feeling highly defeated and triggered. We are seeing more and more people committing suicide over financial strain than we ever have. If you’re working just to live but not actually living, what is the point? 
6. Limited Social and Family Time: Working multiple jobs can limit your time socializing and spending with your family. Social connections are a crucial component of mental health, and not having time to maintain these connections can contribute to feelings of burnout.
7. Lack of Control: If someone works multiple jobs out of financial necessity rather than choice, they may feel a lack of control over their time and life. This feeling can contribute to a sense of helplessness and burnout.
8. Neglected Health: People working multiple jobs or long hours may find it hard to make time for regular exercise, healthy eating, and sleep — all of which are crucial for physical health and emotional resilience. Neglecting these areas can accelerate the path to burnout.

Given these potential risks, it’s crucial to pay attention to signs of burnout and take steps to address it. This may include reassessing workload and time commitments, setting boundaries, prioritizing self-care, seeking social support, and addressing the financial issues that may be driving the need to work multiple jobs. If burnout symptoms persist or lead to depression or other health issues, seeking professional help is recommended.

Remember, You are Not Just a Work Machine

In the evolving landscape of American work, side-hustles have emerged as both a symptom of systemic economic challenges and a potential solution for individual financial needs. As more and more people turn to additional jobs to supplement their income, it becomes clear that the traditional employment model may no longer be sufficient for a large portion of the population. This shift prompts a vital conversation about the future of work, economic security, and financial independence. Navigating this new terrain requires both individual adaptability and societal and policy changes that address wage stagnation, the rising cost of living, and the necessity of benefits. While an intriguing development, the rise of the side-hustle ultimately highlights the urgent need for a broader re-evaluation of work and wealth in America.

Sales Taxes

by Julie Johansson | Jul 17, 2023 | Uncategorized

Nothing is more frustrating than buying groceries or completing a shopping trip and being rung up at the register only to find out your total cost is much more than anticipated. This is because of sales taxes. Many people often forget about sales taxes but get a rude awakening when making purchases, especially larger ones, because sales taxes are a fixed percent. The bigger the purchase, the bigger the sales tax. 

People are already struggling in this super-inflated economy to make ends meet, and taking on sales tax feels like adding insult to injury. Sales taxes are a type of tax that is imposed on the sale of goods and services, and they are a significant source of revenue for state and local governments across the United States. 

Sales taxes are often considered “hidden fees” because they are not always transparent to the consumer, and many people do not fully understand the impact of sales taxes on their daily lives. Also, the sales tax rate varies from state to state and even within the same state, from city to city. 

Sales taxes disproportionately impact low-income people who spend a larger portion of their income and wealth on taxable goods and services. Let’s dive deep into what sales taxes are, how much the United States is making from them, and why they mainly impact lower-income people. 

What are Sales Taxes?

Sales taxes are taxes levied on selling goods and services at the point of sale. State and local governments impose these taxes in the United States. The sales tax rate varies from state to state, with some states having no sales tax, such as Delaware, Montana, New Hampshire, and Oregon. Other states have a state-wide sales tax rate, augmented by local sales taxes varying from city to city. For instance, California has a state-wide sales tax rate of 7.25%, but cities within California can add local sales taxes, bringing the total sales tax rate to as high as 10.25%.

The Purpose of Sales Taxes

The primary purpose of sales taxes is to generate revenue for state and local governments. Sales taxes have been a substantial source of revenue for state and local governments because they are a broad-based tax levied on a wide range of goods and services. Additionally, sales taxes are generally considered a stable revenue source because they are not subject to the same economic fluctuations as income taxes or corporate taxes.

Sales taxes are also used to fund specific government programs, such as infrastructure projects or education programs. For example, some states’ sales tax revenue is dedicated to financing education initiatives. In other states, sales taxes may be used to fund transportation projects, public safety programs, or healthcare initiatives.

Impact on Consumers

Sales taxes have a substantial impact on consumers. First, sales taxes increase the price of goods and services, which can already be particularly burdensome for low-income households. For example, a 10% sales tax on a $100 purchase increases the total cost to $110. This additional cost is a burden for families who are already struggling to make ends meet.

Sales taxes are regressive, meaning they place a greater burden on low-income households than high-income households. This is because low-income households spend a higher percentage of their income on goods and services than high-income households. The regressive nature of sales taxes is typically seen through the lens of income.  But, seen through the lens of wealth, they are even more regressive as has been pointed out by Dr. Mitch in his book A Taxing Problem. The Psychologist’s Prescription for a Just Tax System.  Therefore, a sales tax that is the same percentage for everyone can appear to be fair, but it is disproportionately burdensome for low-income and middle-income households.

Impact on Businesses

Sales taxes also impact businesses. Sales taxes are an additional administrative burden for businesses that sell goods or services. Businesses must collect sales taxes from customers, maintain accurate records of sales tax revenue, and remit the taxes to state and local governments. This can be particularly burdensome for small businesses that may need more resources to hire additional staff to manage sales tax compliance.

Sales taxes can impact consumer behavior. When the price of goods and services increases due to sales taxes, consumers may be more likely to shop around for better deals or delay their purchases until prices drop. This can be particularly challenging for businesses that operate in competitive markets.

United States Yearly Revenue from Sales Tax

The revenue generated by sales taxes in the United States varies yearly. It depends on various factors, such as the state of the economy, changes in tax laws, and consumer spending habits. According to the U.S. Census Bureau, in 2019, state and local governments in the United States collected a total of $446.4 billion in sales and gross receipts taxes, including state and local sales taxes and other types of gross receipts taxes.

In addition to state and local sales taxes, the federal government also collects excise taxes on specific goods, such as gasoline, tobacco, and alcohol, which can be considered a type of sales tax. In 2019, the federal government collected a total of $97.8 billion in excise taxes, according to the U.S. Department of the Treasury.

Therefore, the total revenue generated by sales taxes in the United States in 2019, including state and local sales taxes and federal excise taxes, was $544.2 billion. It’s worth noting that this number does not include other types of taxes that are levied on goods and services, such as value-added taxes (VATs) or tariffs on imported goods, which can also impact the price of goods and services for consumers.

United States Sales Tax History

The history of sales taxes in the United States dates to the early 20th century when states began to adopt the tax to generate revenue for government programs. 

Origins of Sales Taxes

The first sales tax in the United States was implemented in West Virginia in 1921. The tax was a one percent tax on retail sales of tangible personal property and was intended to generate revenue for the state’s road construction program. The tax proved to be successful, and other states soon followed suit.

By the end of the 1930s, sales taxes had been adopted by 18 states. Taxes were primarily used to fund education and infrastructure programs like highways and bridges. However, the taxes were not uniform across states, and there needed to be more consistency in what was subject to the tax and how it was collected.

Expansion and Uniformity

In the 1940s and 1950s, sales taxes continued to expand and became more uniform across states. Adopting the Uniform Sales and Use Tax Act in 1951 helped standardize sales tax laws across states and made it easier for businesses to comply with the tax. The act provided a model for states to follow, which helped to reduce the administrative burden of complying with the tax.

In the 1960s and 1970s, sales taxes continued evolving as states sought ways to generate revenue to fund new government programs. Many states began to expand the items subject to sales tax, including services and digital goods. For example, in the 1970s, California expanded its sales tax to include haircuts and dry-cleaning services.

In the 1980s and 1990s, sales taxes continued to expand as states faced increasing pressure to fund new government programs, such as healthcare and education. Many states also began to shift the tax burden from businesses to consumers by increasing the sales tax rate.

Internet Sales and the Future of Sales Taxes

In recent years, the rise of e-commerce has presented new challenges for sales taxes. Online retailers, such as Amazon, were initially not required to collect sales taxes on their sales, which put brick-and-mortar retailers at a disadvantage. However, in 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states could require online retailers to collect sales taxes, even if they had no physical presence there.

The ruling has led to a patchwork of sales tax laws across states, with some states implementing economic nexus laws that require online retailers to collect sales taxes if they meet certain sales thresholds in the state. The issue of online sales taxes is likely to evolve as e-commerce continues to grow and states look for ways to generate revenue from online sales.  Of course, if adoption of the FairTaxSystem as described by Dr. Mitch in his book, A Taxing Problem eliminates sales tax, the sales tax issues will disappear.

Sales Tax and Its Impact on the Poor and Lower Class

Sales taxes primarily burden the lower class and poor, and secondarily the middle class.  This disproportionate impact results from several factors. In this blog, we will explore why sales taxes disproportionately affect low-income households, the effect of sales taxes on people with low incomes and moderate incomes, and potential solutions to address this issue.

Regressive Taxation

One reason why sales taxes disproportionately affect low-income and moderate-income households is because they are regressive. Regressive taxation means these households pay a higher percentage of their income and wealth in taxes than high-income and wealthy households. Since sales taxes are the same percentage for everyone, low-income households end up paying a larger share of their income and wealth in taxes than wealthier households. For example, a household that earns $20,000 per year may spend a larger percentage of their income on goods and services subject to sales tax than a household that earns $200,000 per year.

Essential Goods

Sales taxes also disproportionately impact low-income households because they often spend a larger share of their income on essential goods and services, such as food, clothing, and medicine. These goods and services are often subject to sales taxes, meaning that low-income households pay a larger share of their income in taxes compared to wealthier families.

For example, a household that earns $20,000 per year may spend a more significant percentage of its income on groceries than a household that earns $200,000 per year. If both households live in a state with a 6% sales tax, the lower-income household will pay a larger share of their income in sales taxes because they spend a larger share of their income on groceries, which are subject to the sales tax.

Limited Ability to Avoid Sales Taxes

Another reason why sales taxes disproportionately affect low-income households is that they have limited ability to avoid paying sales taxes. Low-income households may need more resources to travel to neighboring states with lower sales tax rates or buy online items from retailers that do not collect sales taxes. 

Impact on the Poor

The disproportionate impact of sales taxes has the most significant consequences for the poor. When low-income families are forced to pay a larger share of their income in sales taxes, they may have to cut back on essential goods and services, such as food, clothing, and medicine. Cutting back on essentials can lead to increased financial stress, reduced access to basic needs, increased risk of poverty, increased stress and the health risks that come with these.

For example, a single mother with two children who earns $25,000 per year may spend 20% of her income on groceries. If she lives in a state with a 6% sales tax, she will pay $300 per year in sales taxes on groceries alone. This may not seem like a significant amount, but it can have a significant impact on her ability to afford other essential goods and services.  

Solutions to Address Disproportionate Impact

Policymakers could consider several solutions to address the disproportionate impact of sales taxes on low-income households. One potential solution is to exempt essential goods and services from sales taxes. For example, many states exempt groceries and prescription drugs from sales taxes. Expanding these exemptions to include other essential goods and services, such as clothing and medical services, could help reduce the tax burden on low-income households.

Another solution is to increase the tax system’s progressively by increasing income taxes on higher-income households. This would help reduce the burden of regressive taxes on low-income households, such as sales taxes. However, this solution would require significant political will, would be very difficult to implement, and might face opposition from higher-income households and businesses. Low-income households could become qualified for sales tax exemptions like they can qualify for food stamps.  This however would add another level of bureaucracy with the attendant costs and additional logistical problems for sellers of goods and services.  

The best solution, it would appear, is to eliminate sales taxes altogether and impose a small annual tax on wealth to fund government and its societal functions.  This in short is the solution proposed by Dr. Mitch in A Taxing Problem,The Psychologist’s Prescription for a Just Tax System.  

Sales Taxes as “Hidden Taxes” or “Hidden Fees”

Sales taxes are often considered “hidden taxes” or “hidden fees” because they are not always transparent to the consumer. Here are a few reasons why:

1. Included in the Purchase Price: Sales taxes are included in the purchase price of goods and services, making it difficult for consumers to distinguish the specific costs associated with the tax.
2. Variations Between States: Sales tax rates can vary significantly between states and even between cities within a state. This can make it difficult for consumers to understand the specific costs associated with sales taxes when traveling or moving from one location to another.
3. Limited Information at the Point of Sale: Retailers may not always provide detailed information about the amount of sales tax included in the purchase price. This can contribute to a perception of “hidden fees” or a lack of transparency.
4. Not Always Applied Uniformly: Sales tax exemptions, such as those for certain goods or for certain purchasers, may not always be applied uniformly or consistently. This can make it difficult for consumers to understand the specific costs associated with sales taxes for different goods and services.

The perception of sales taxes as “hidden taxes” or “hidden fees” is often due to a lack of transparency and variability in the application of sales taxes. However, policymakers and government agencies can work to increase transparency and consistency in the application of sales taxes to inform consumers better and address concerns about hidden costs.

Dr. Mitch’s Proposed Solution

Again, the best solution to this and other tax inequities, it would appear, is to eliminate sales taxes altogether and impose a small annual tax on wealth to fund government and its societal functions.  This in short is the solution proposed by Dr. Mitch in A Taxing Problem,The Psychologist’s Prescription for a Just Tax System.  

Regressive Taxation

by Julie Johansson | Jul 17, 2023 | Uncategorized

What is Regressive Taxation

Conventionally regressive taxation has been defined as a tax policy that results in the tax burden falling disproportionately on low-income earners. In contrast, high-income earners pay a lower percentage of their income in taxes. This means that as income decreases, the percentage of income paid in taxes increases. 

In his book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System, the author, Dr. Mitch, puts a finer point on the definition.  In other words, regressive taxation takes on a more significant meaning.  First, taxation  is broadly understood as any of the many ways the government finances its programs and activities.  Second, the regressive nature of our institutionalized systems of taxation, or government revenue raising, is looked at with a view of wealth and wealth preservation, rather than income.  Therefore, regressive taxation comes to mean the many ways that government is financed that land heavily on the backs of the poor and middle class to the benefit of the wealthiest among us.

Regressive taxation in this sense takes many forms, such as sales tax, and excise taxes, property taxes, park entrance fees, motor vehicle registration fees, driver’s license fees, road tolls, gasoline taxes, professional license related fees and charges, corporate filing fees, franchise taxes, tobacco taxes, etc., etc., etc. You get the point.  

For example, a sales tax is regressive because it takes a larger percentage of wealth from those with less than with more.  It’s true that sales tax has been demonstrated to be highly regressive when considered against incomes, but, it  is even more so when considered against wealth.  

Regressive taxation is often criticized for being unfair and inequitable, as it can exacerbate inequality and make it more difficult for low-income earners to build wealth, or even make ends meet. Progressive income taxation is a tax policy in which higher earners pay a higher percentage of their income in taxes while lower earners pay a lower percentage. Progressive income taxation is viewed as more equitable and fairer, but it is still very regressive when considered against wealth. 

In her book Caste: The Origins of Our Discontents, Isabel Wilkerson, makes the point that what we criticize as institutional racism is better understood as caste.  She states, “Caste is the granting or withholding of respect, status, honor, attention, privileges, resources, benefit of the doubt, and human kindness to someone on the basis of their perceived rank or standing in the hierarchy.”  Her point, it seems, is well taken, especially when made in the context of her excellent book.  Our systems of funding government and its programs have the effect of maintaining the caste systems in our country. Regressive taxation in the sense here described is fundamentally unfair, a point that is convincingly made in Dr. Mitch’s book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System.

Regressive taxation negatively impacts low-income earners and the overall impact on income inequality. It is crucial to consider the potential negative effects when implementing tax policies and to strive for more equitable and fair tax policies, such as Dr. Mitch’s proposal as detailed in his book, A Taxing Problem – The Psychologist’s Prescription for a Just Tax System.

Types of Regressive Taxation

Here are some of the types of regressive taxation:

Sales Taxes

Sales taxes are a form of regressive taxation imposed on the purchase of goods and services. They are typically imposed at the state or local level, and the tax rate can vary widely depending on the location and type of goods or services being taxed. Sales taxes are levied as a percentage of the price of the item being sold and are added to the total cost at the point of sale.

Sales taxes are regressive because they take a larger percentage of income from those with lower incomes, who may have to spend a larger proportion of their income on necessities such as food, clothing, and housing. Since the tax rate is the same for everyone, regardless of income level, it disproportionately impacts those with lower incomes and less wealth.

However, proponents of sales taxes argue that they are an essential source of revenue for state and local governments and can be an effective way to fund public services such as education, healthcare, and infrastructure. Sales taxes are also relatively easy to administer since they are collected at the point of sale and do not require extensive record-keeping or reporting. 

Critics of sales taxes argue that they are regressive and unfair since they disproportionately affect low-income earners and those with little wealth. They also point out that sales taxes can be especially burdensome on those with fixed incomes or those living in poverty, who may have to spend a more significant portion of their income on taxable items.

Overall, sales taxes are a controversial form of taxation that can positively and negatively impact individuals and communities. While they have been an essential source of revenue for state and local governments, it is vital to consider the potential impacts on low-income earners and to strive for more equitable and fair tax policies.

Excise Taxes

Excise taxes are another regressive taxation like sales taxes but imposed on specific goods and services, such as tobacco products, alcohol, gasoline, and luxury goods. Unlike sales taxes, which are applied to a broad range of goods and services, excise taxes target specific products.  Excise taxes are regressive because they, too, take a larger percentage of income from those with lower incomes and less wealth, who may be more likely to purchase these products. For example, a cigarette tax disproportionately affects low-income earners more likely to smoke than higher-income earners.

The goal of excise taxes is typically to discourage consumption of the taxed products, either for health or environmental reasons or to generate revenue for specific programs or initiatives. For example, income from gasoline taxes is often used to fund transportation infrastructure projects.

While excise taxes can effectively discourage the consumption of certain products and generate revenue for specific programs, they can also be controversial. Critics of excise taxes argue that they are regressive and unfairly burden low-income earners. They also point out that excise taxes can be challenging to administer and enforce and may create incentives for illegal activities such as smuggling.

Flat Taxes on Income

Flat taxes on income are regressive taxation where everyone pays the same percentage of their income in taxes, regardless of their income level. This means that a person earning $30,000 per year would pay the same percentage of their income in taxes as someone earning $300,000 per year.

Flat taxes are often seen as simple and easy to administer, as there is no need to calculate different tax rates based on income level. However, critics argue that flat taxes are unfair and regressive because they disproportionately impact low-income earners.

Since everyone pays the same percentage of their income in taxes under a flat tax system, low-income earners are disproportionately hurt. For example, a person earning $20,000 per year who pays 10% of their income in taxes would pay $2,000 in taxes, while someone earning $200,000 per year who also pays 10% of their income in taxes would pay $20,000 in taxes. The person earning $20,000 per year would be left with much less disposable income than the person earning $200,000.

Critics also argue that flat taxes on income do not consider the ability to pay. For example, someone earning $20,000 per year may struggle to pay for basic necessities such as housing, food, and healthcare, while someone earning $200,000 per year may have more disposable income to cover these expenses.

Overall, flat taxes on income are a controversial form of taxation that can have both benefits and drawbacks. While they are simple to administer, they can be seen as regressive and unfair to low-income earners. It is essential to consider the potential impacts on different income levels when implementing tax policies and strive for more equitable and fair tax policies, such as progressive taxation.

Historically, flat taxes on income have been proposed but not enacted.  The popular appeal is based upon the ideas of simplicity and the appearance of fairness.  But they have never been enacted into law because they are so unfair.  In his book, A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch, the author, proposes a flat tax of a different sort, a flat tax on wealth or net worth, as an important part of his prescription. His premise recognizes that in economic terms, the benefits of an organized society inure in direct proportion to wealth, since it is only through that organization, enforced by government, that anyone can accumulate and maintain control and possession of wealth.

Property Taxes

Property taxes are a type of taxation that is levied on the value of real estate, such as homes, land, and buildings. Local governments, such as cities or counties, usually impose property taxes. They are often used to fund local services such as schools, police and fire departments, and road maintenance.

The amount of property tax owed is typically calculated based on the property’s value, with higher-valued properties paying more in taxes than lower-valued properties. The tax rate can vary depending on the location and type of property being taxed.

Property taxes can be regressive because when they take a more significant percentage of income from those with lower incomes. For example, a person who owns a modest home valued at $100,000 may pay a more significant percentage of their income in property taxes than someone who owns a more expensive home valued at $1 million. Additionally, since property taxes are typically used to fund local services such as schools, police, and fire departments, neighborhoods with lower valued properties wind up with underfunded schools, police, and fire departments.

Social Security Payroll Taxes

Social Security payroll taxes are withheld from an individual’s paycheck to fund Social Security benefits. These taxes are levied on wages and salaries up to a certain amount, known as the Social Security wage base, adjusted annually. In 2022, the Social Security wage base will be $147,000.

The Social Security payroll tax is currently set at 12.4%, with employers and employees each contributing 6.2%. Self-employed individuals must pay both the employer and employee portions of the tax for a total of 12.4%. The tax funds the Social Security retirement, disability, and survivor benefits.

Social Security payroll taxes are regressive because they are levied on a fixed income up to the wage base. This means low-income earners pay more of their disposable income in Social Security payroll taxes than high-income earners. Consider the example of a person earning $50,000 per year. Total social security taxes paid on his income would be $6,200 per year.   For someone earning $147,000 per year, $18,228 would be paid into social security. That would have a less significant impact on the lifestyle he could afford than $6,200 per year would have on the lifestyle of the $50,000 a year earner.  At retirement age, the high earner would receive far more in social security benefits than lower earner.  This reality means that the inequality between these earners is maintained even after retirement age.  But the tax is even more regressive because for someone earning $500,000 a year only $18,228 is being paid into social security. This is only a little more than 3 ½ percent of his income.  

Nevertheless, some view Social Security payroll taxes as progressive because the benefits they fund are designed to provide a safety net for those with lower incomes, such as retired or disabled individuals. Social Security benefits are calculated though based on an individual’s average lifetime earnings, with lower earners receiving a higher percentage of their pre-retirement income than higher earners.

Social Security payroll taxes are a controversial form of taxation that can positively and negatively impact individuals and communities. While they are considered regressive because they take a more significant percentage of income from low-income earners, they also fund essential social welfare programs that benefit those with lower incomes. 

Who Does Regressive Taxation Benefit

Regressive taxation benefits higher-income earners, as they can absorb the tax burden more easily than lower-income earners. This is because lower-income earners typically have less disposable income and spend more of their income on necessities such as food, housing, and healthcare. Therefore, regressive taxation can disproportionately impact low-income earners and exacerbate income inequality and ultimately wealth inequality.

Regressive taxation can also benefit governments and other entities that rely on tax revenue to fund programs and services. Since some regressive taxes may be easier to administer than progressive taxes, they may be more attractive to government as a way to generate revenue without collecting extensive information. Of course, in our system, since elected officials must rely upon private funding to get elected, they also will be more inclined to maintain systems of taxation that benefit the wealthy.  The benefits of regressive taxation are generally limited to those who can absorb the tax burden, such as higher-income earners, those with substantial accumulated wealth, and corporations. The same interests that elected officials depend upon to fund campaigns.

Who Does Regressive Taxation Hurt?

Regressive taxation tends to hurt lower-income earners more than higher-income earners. Regressive taxation hurts lower-income earners because lower-income earners have less disposable income and spend a larger proportion of their income on necessities such as food, housing, and healthcare. Regressive taxes, such as sales and excise taxes, increase the cost of these necessities and create a more considerable financial burden for those with limited income.

Regressive taxation exacerbates income and wealth inequality, disproportionately affecting those with lower incomes. This can make it more difficult for low-income earners to break out of poverty and improve their finances.

Regressive taxation hurts those struggling to make ends meet, such as low-income earners and those living in poverty. It is crucial to consider the potential impacts on different income levels carefully and to strive for a fair and equitable tax policy that supports the needs of all individuals and communities. In his thought-provoking book, A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch does just that. 

Conclusion 

Regressive taxation is a form of taxation that tends to affect low-income earners and exacerbate income inequality disproportionately. Regressive taxation affects low-income people the most because regressive taxes, such as sales and excise taxes, take a more significant percentage of income from those with lower incomes, who may have to spend a more substantial proportion of their income on necessities.

While regressive taxation can be an easy way to generate revenue for governments and other entities, it can create financial burdens for those struggling to make ends meet. These financial burdens can make it more difficult for low-income earners to break out of poverty and improve their finances.

It is important to carefully consider the potential impacts on different income levels when implementing tax policies and to strive for a fair and equitable tax policy that supports the needs of all individuals and communities. While regressive taxation may be attractive in the short term, it can create long-term negative impacts on those who are already marginalized and struggling to make ends meet.

Motor Vehicle Fees

by Julie Johansson | Jul 17, 2023 | Uncategorized

Do you ever feel like the United States tax system is using you? Are you paying fees to the government at every turn. Or perhaps you feel like you simply don’t understand how these things work, but in your gut, you feel like you’re missing a big part of the picture that impacts your life. Most people are not privy to just how much Americans are taxed, often by other names, and through what avenues. Motor vehicle fees are one of many types of payments to government that can be called a “hidden tax.” 

Here we will explore motor vehicle fees, where they originated, and how they impact the lower class disproportionately. We will also divulge the amount of motor vehicle fees that governments collect yearly. 

What are Motor Vehicle Registration Fees?

Motor vehicle registration fees are taxes by another name that are levied upon the registration of motor vehicles, including cars, trucks, motorcycles, and other types of vehicles. State and local governments collect these taxes, and the amounts are typically based on the value of the vehicle, its weight, or its age. These taxes generate revenue for state and local governments to fund transportation-related programs and projects, such as road maintenance, bridge construction, and public transportation. To be sure, it is important to maintain roads, build and maintain bridges, and provide public transportation.  But, today, the primary beneficiaries of spending for this type of infrastructure are the wealthy.  That point is cogently made in Dr. Mitch’s book, A Taxing Problem, which points out the inherent injustice in the way our governments provide for the funding of itself and its programs.

Motor vehicle registration taxes are a form of “use tax,” meaning that they are levied on the use of a vehicle on public roads and highways. This is different from a sales tax, which is levied on the purchase of a vehicle, regardless of whether it is used on public roads or not.  Sales taxes on our vehicles are substantial, and that topic has been dealt with in another post.

Purpose of Motor Vehicle Registration Taxes

Motor vehicle registration taxes primarily generate revenue for state and local governments to fund transportation-related programs and projects. These taxes are a direct way to generate revenue from those who use the transportation infrastructure. In that way, they are rationalized as a fair tax.  

In addition to funding transportation-related programs and projects, motor vehicle registration taxes can also be used to encourage certain types of behavior. For example, some states offer tax breaks or incentives for drivers who purchase electric or hybrid vehicles to encourage the use of more environmentally friendly vehicles.

Impact on Consumers

Motor vehicle registration taxes can have a significant impact on consumers. These taxes increase the cost of owning and operating a vehicle. For example, if a motor vehicle registration tax is based on the vehicle’s value, a more expensive vehicle will result in a higher tax bill. Tax based on vehicle value can be particularly burdensome for low-income households that may struggle to afford the cost of owning a vehicle in the first place.

Motor vehicle registration taxes can vary significantly from state to state, creating confusion for drivers who move from one state to another. For example, the motor vehicle registration tax in California is based on the vehicle’s value, while in Arizona, it is based on the vehicle’s weight. This can make it difficult for drivers to plan for the cost of vehicle ownership when moving to a new state.

Impact on Governments

Motor vehicle registration taxes also impact governments. These taxes are a substantial source of revenue for state and local governments, but they can be unpredictable from year to year. For example, economic changes, consumer behavior, or transportation infrastructure needs can impact the revenue generated by motor vehicle registration taxes.

Additionally, motor vehicle registration taxes can create administrative burdens for governments. Collecting and processing these taxes requires significant resources and can be challenging for small or underfunded government agencies.

Motor vehicle registration taxes can also significantly impact consumers, increasing the cost of owning and operating a vehicle. As governments continue to rely on these taxes to fund transportation-related programs and projects, policymakers must balance the need for revenue with the impact on consumers and the administrative burden on governments.

One way that governments assure a steady flow of income from registration fees is through requiring regular re-registration of vehicles periodically.  This of course adds to the expense of owning and using a vehicle, costs that weigh most heavily on the poor and middle class.

History of Motor Vehicle Registration Fees

Here is a brief history of motor vehicle registration fees in the United States so you can better understand where they came from and how they came about:

• The first motor vehicle registration fees were introduced in 1901 in New York to generate revenue for the state and ostensibly track the number of vehicles on the roads.  Requiring the registration of vehicles will serve the purpose of tracking the number of vehicles on the roads.  The charging of fees for registration, of course, only serves to generate revenue for the states.
• By 1911, many states had implemented motor vehicle registration fees to generate revenue and to regulate vehicle ownership and operation.
• In the 1930s, during the Great Depression, many states raised their motor vehicle registration fees to generate more revenue as the economic crisis had reduced other sources of income for states.
• During World War II, some states imposed additional registration fees on commercial vehicles to support the war effort.
• As highway construction boomed in the 1950s and 1960s, many states raised motor vehicle registration fees to fund highway construction and maintenance.
• In the 1970s and 1980s, many states introduced additional fees, such as emissions testing fees, to regulate vehicle emissions and air quality.
• In the 1990s, some states introduced higher fees for specialty license plates to generate revenue for specific causes or organizations.
• Recently, some states have increased motor vehicle registration fees to generate revenue for transportation-related programs, such as road and bridge repairs, and to support environmental initiatives, such as electric vehicle incentives.

Yearly Revenue from Motor Vehicle Registration Fees

The amount of revenue generated by motor vehicle registration fees in the United States varies from year to year. It depends on various factors, such as the number of registered vehicles, changes in registration fees, and changes in vehicle ownership patterns. According to the U.S. Census Bureau, state and local governments collected a total of $37.3 billion in motor vehicle registration fees and taxes in 2019.

This number includes both motor vehicle registration fees and other taxes and fees related to motor vehicles, such as fuel taxes and vehicle rental taxes. However, it does not include revenue generated by tolls or other fees that are specifically related to the use of highways or bridges. Nor does it include fees charged for driver license fees.

Motor vehicle registration fees vary widely from state to state, with some states charging a flat fee for vehicle registration and others basing the fee on the value, weight, or age of the vehicle. Additionally, some states charge additional fees for specialized license plates or other services related to vehicle registration.

Regarding federal revenue generated by motor vehicle registration fees, there is no direct federal tax on motor vehicle registration. However, the federal government does collect excise taxes on the sale of new trucks, trailers, and other large vehicles. In 2019, the federal government collected a total of $7.8 billion in excise taxes on large vehicles, according to the U.S. Department of the Treasury.

Therefore, the total amount of revenue generated by motor vehicle registration fees and related taxes in the United States in 2019, including both state and local fees and federal excise taxes, was approximately $45.1 billion.

Motor Vehicle Registrations Fees Mainly Impact Lower Income People

Motor vehicle registration fees can disproportionately impact the lower class and the middle class, as these fees are a fixed cost that can represent a significant portion of their income, and even their wealth. 

Regressive Taxation

Because motor vehicle registration fees disproportionately affect low-income households, they are regressive. Regressive taxation means lower-income households pay a higher percentage of their income in taxes than higher-income households. As regressive as these taxes are relative to income, they are even more so relative to wealth.  This is a point convincingly made in A Taxing Problem by Dr. Mitch.  Motor vehicle registration fees represent a larger share of low-income households’ income than for higher-income households.  Again, this is even more true relative to wealth.

For example, if a state charges a flat fee of $100 for motor vehicle registration, a household that earns $20,000 per year would pay 0.5% of its income to pay the fee, while a household that earns $200,000 per year would pay only 0.05% of its income. This means that low-income households are paying a higher percentage of their income in motor vehicle registration fees than higher-income households, making it a regressive tax. Now if a household with a net worth of $1,000 paid the same fee to register a vehicle, that $100 represents 10% of net worth.  If a household with a net worth of $50,000 paid the same registration fee, that fee would represent only .2% of its net worth.  Relative to net worth, that fee is 5000 times greater. Looking at the fairness of taxation through the lens of wealth instead of income is the focus of A Taxing Problem by Dr. Mitch.

The impact of motor vehicle registration fees on low-income households can be particularly significant because many low-income households rely on their vehicles for transportation to work, school, and other essential services. In some cases, low-income households may not have access to public transportation, making vehicle ownership a necessity.

When low-income households are forced to pay a larger share of their income or wealth in motor vehicle registration fees, they must cut back on essential goods and services, such as food, clothing, and healthcare. This can lead to increased financial stress, reduced access to basic needs, increased risk of poverty, increased stress and the health problems that come with poverty and stress.

To address the regressive nature of motor vehicle registration fees, policymakers could consider several solutions. One potential solution is to exempt low-income households from the fees or to provide a sliding scale fee based on income. For example, some states offer reduced fees for seniors or disabled individuals, and this could be expanded to include low-income households.

The best solution, though, as shown in A Taxing Problem by Dr. Mitch is to eliminate these charges and fund government and its services through applying a small annual tax on wealth, or net worth.  In this way, the expenses of government that enable the accumulation and preservation of wealth would be borne in direct relation to the economic benefits enjoyed by each taxpayer.  

Limited Mobility 

Motor vehicle registration fees are a type of tax that state and local governments charge on the registration of motor vehicles. These fees have a significant impact on the poor, primarily through limited mobility. 

Limited mobility refers to the limited ability of low-income households to access transportation due to the cost of vehicle ownership. Motor vehicle registration fees can increase the cost of owning a vehicle, making it more difficult for low-income households to afford vehicle ownership. Registration fees, in turn, can limit their mobility and access to essential services, such as work, school, and healthcare when they can’t afford to own and maintain a vehicle.

For low-income households living in areas with limited public transportation, vehicle ownership may be the only means available to them. When motor vehicle registration fees increase the cost of vehicle ownership, low-income households may be unable to afford the registration cost. As a result, they may be unable to drive their vehicles legally, limiting their access to essential services and opportunities.

Limited mobility can have significant consequences, including increased financial stress, reduced access to education and employment opportunities, and increased risk of poverty. For example, suppose a low-income household cannot afford the cost of motor vehicle registration fees. In that case, members of that household may be unable to commute to work, limiting the ability to earn a living wage.  Even if public transportation is available, its use typically requires more planning and time to be mobile.  

Motor Vehicle Taxes as “Hidden Taxes”

Motor Vehicle Registration Fees are “hidden taxes” or “hidden fees” because they are not always transparent to the consumer. Here are a few reasons why:

1. Fixed Cost: Motor vehicle registration fees are a fixed cost not directly tied to the vehicle’s value or the owner’s income. This means that the registration cost may not be immediately apparent to the consumer and can be easily overlooked or forgotten.
2. Billed Annually: Motor vehicle registration and other fees, such as insurance premiums and property taxes, are typically billed annually. This can make it difficult for consumers to distinguish the specific costs associated with registration fees.
3. Paid Through Dealerships: Vehicle registration fees are sometimes paid through dealerships as part of the vehicle purchase process. This can make it difficult for consumers to understand the specific costs associated with registration fees and can contribute to a perception of “hidden fees.”
4. Variations Between States: Motor vehicle registration fees can vary significantly between states and even between counties within a state. Differences in fees can make it difficult for consumers to understand the specific costs associated with registration fees when moving from one location to another.

The perception of Motor Vehicle Registration Fees as “hidden taxes” or “hidden fees” is often due to a lack of transparency in the billing process and cost variations between states and counties. However, policymakers and government agencies can work to increase transparency and clarity around these fees to inform consumers better and address concerns about hidden costs. Of course, the need for motor vehicle ownership and use is greater today that it was in the early 1900’s when people traveled shorter distances, traveled on foot or horse drawn wagons, etc.  Without motor vehicle ownership our economy would collapse. That economy in economic terms benefits each one of us in direct proportion to our wealth or net worth.  That is why these fees are today unfair.  They contribute to the lack of economic justice that fuels the divisions and anger in our society and lead to violence. This form of paying for government, should, in the view of Dr. Mitch be eliminated in favor of a just tax system as described and advocated in his book, A Taxing Problem.

Franchise Taxes

by Julie Johansson | Jul 17, 2023 | Uncategorized

Franchise taxes are a type of tax levied on corporations by states in the United States. Corporations and similar business entities enjoy certain legal benefits.  One is the ability to exist indefinitely until terminated by the desire of the owners, or until declared insolvent and allowed to die.  This allows the business of the corporation to persist beyond the lives of those who began the business. It also allows for the accumulation of capital and ownership separate from people who manage the business of the corporation. In this way corporations allow the accumulation of wealth benefited by professional management. Another important benefit of incorporation is that it shields its shareholders from liability for the actions of the corporation beyond the shareholders’ investment in the corporation.

It is beyond the scope of this writing to explore corporations and related entities more fully. Suffice it to say that the price exacted for these benefits of incorporation is that the corporation must be chartered in a sovereign jurisdiction. Each state in the United States has the power to enact laws allowing for the charter of a corporation under its laws. This has created a push-pull competition between the states to attract corporations to be chartered within that state as opposed to another.

Many public corporations have historically been chartered in Delaware because of that state’s aggressive posture at providing benefits and protections to its corporations and shareholders. Many corporations are chartered in Nevada so as to avoid corporate income taxes.  And so, the game has gone on and continues to go on.

Corporations pass on the costs of franchise taxes to consumers in the as higher prices for goods and services, which can make it more difficult for lower-income people to afford necessities. This is problematic in the United States, where income and wealth inequality are significant and growing issues. 

What are Franchise Taxes?

Franchise taxes are a type of tax that is levied by state governments on businesses that are incorporated or registered to do business within the state. These taxes are separate from federal, state, and local income taxes and are imposed by each state individually.

The specific rules and regulations governing franchise taxes vary between states, but they are typically based on the business’s net worth, capital stock, or other factors related to the business’s size and financial position. For example, some states calculate franchise taxes based on the value of a corporation’s outstanding shares of stock, while others calculate the tax based on a company’s assets or net income.

Franchise taxes are typically paid annually and are used to generate revenue for state governments, which are responsible for providing public services and infrastructure that benefit businesses and the community. These taxes are used to fund a wide range of services, including education, public safety, transportation, and healthcare. 

Franchise taxes are separate from federal income taxes and are imposed by each state individually. Therefore, the rules and regulations governing franchise taxes vary significantly between states, and businesses that operate in multiple states may be subject to different franchise tax requirements in each jurisdiction.

The purpose of franchise taxes is to generate revenue for state governments. 

How do Franchise Taxes Work?

Franchise taxes are a type of tax that state governments charge on businesses incorporated or registered to do business within the state. The specific rules and regulations governing franchise taxes vary between states, but some general principles apply across most jurisdictions. Here’s how franchise taxes work in the United States:

• What is the Basis for Franchise Taxes?

The basis for franchise taxes varies between states. Still, it is typically based on the business entity’s net worth, capital stock, or other factors related to the business’s size and financial position. For example, some states calculate franchise taxes based on the value of a corporation’s outstanding shares of stock, while others calculate the tax based on a company’s assets or net income.

• Who Pays Franchise Taxes?

Franchise taxes are typically paid by corporations, limited liability companies (LLCs), and other types of businesses that are incorporated or registered to do business within the state. In some cases, businesses that are not incorporated or registered to do business within the state may also be subject to franchise taxes if they have a significant presence within the state.

• When are Franchise Taxes Due?

The due date for franchise taxes varies between states, but it is typically based on the anniversary of the business’s incorporation or registration to do business within the state. For example, some states require franchise taxes to be paid on the first day of the business’s fiscal year, while others require the tax to be paid on the anniversary of the business’s incorporation or registration.

• How is the Amount of Franchise Tax Determined?

The amount of franchise tax owed by a business is typically calculated based on the basis for the tax (such as net worth or capital stock) and the tax rate established by the state. The tax rate for franchise taxes varies between states, and it may be a flat rate or a percentage of the basis for the tax.

• What Happens if a Business Doesn’t Pay Franchise Taxes?

If a business fails to pay franchise taxes on time or in the correct amount, the state may take several actions to collect the tax. This may include imposing penalties and interest on the unpaid tax, seizing assets or property, or revoking the business’s right to do business within the state.

History of Franchise Taxes

Franchise taxes have a long history in the United States, dating back to the early 20th century. Here is a brief overview of the history of franchise taxes in the United States:

• Early 20th Century: In the early 1900s, several states began levying franchise taxes on corporations. These taxes were based on the corporation’s capital stock’s value and were used to fund state government operations.
• Great Depression Era: During the Great Depression of the 1930s, several states increased their franchise tax rates to generate additional revenue. Franchise taxes became an essential source of revenue for state governments during this period.
• Post-World War II Era: In the post-World War II era, franchise taxes continued to be an essential source of revenue for state governments. Many states updated their franchise tax laws during this period to reflect changes in the business landscape, such as the growth of multistate corporations.
• Late 20th and Early 21st Centuries: In recent decades, franchise taxes have remained an important source of revenue for state governments, although the specific rules and regulations governing these taxes vary significantly between states. Some states have updated their franchise tax laws in response to changes in the economy and business practices, such as the growth of online retailers.

Impact of Franchise Taxes

Franchise taxes can significantly impact businesses, particularly small businesses that may have limited resources to cover the costs of these taxes. For example, small businesses may have a relatively low net worth or capital stock but may still be required to pay significant franchise taxes. This can place a significant financial burden on these businesses, making it more difficult for them to grow and succeed.

Franchise taxes can also impact the state’s economy. These taxes are used to fund public services and infrastructure that benefit businesses and individuals alike. For example, franchise taxes may be used to fund the construction and maintenance of roads, bridges, and other infrastructure businesses rely on to transport goods and services. These taxes may also be used to fund public schools, which help to educate the workforce that businesses depend on.

Franchise Tax Disproportionately Impact Lower-Middle Income People

Franchise taxes are a tax that state governments impose on businesses incorporated or registered to do business within the state. These taxes are used to generate revenue for state governments, which are responsible for providing public services and infrastructure that benefit businesses and the community. However, franchise taxes can significantly impact lower-middle-income people, as these individuals may be more likely to work for or rely on small businesses that are subject to franchise taxes. Franchise taxes are virtually invisible to the public and become a significant obstacle for the poor and even the middle class to obtain the business benefits of incorporation.  

Impact on Small Businesses

Franchise taxes are a tax levied by state governments on businesses incorporated or registered to do business within the state. These taxes can significantly impact small businesses, which may have limited resources to cover the costs of these taxes. Here are some of the ways that franchise taxes can impact small businesses:

1. Financial Burden

Franchise taxes can place a significant financial burden on small businesses. Small businesses may have a relatively low net worth or capital stock but may still be required to pay significant amounts in franchise taxes. This can make it more difficult for small businesses to invest in their operations or to repay loans.

2. Difficulty in Growth

Franchise taxes can make it more difficult for small businesses to grow and expand their operations. When businesses are required to pay significant amounts in franchise taxes, they may have less money available to invest in their business or to hire new employees. This can limit the ability of small businesses to expand their operations and create new job opportunities.

3. Competitiveness

Franchise taxes can also impact the competitiveness of small businesses. When small businesses are required to pay significant amounts in franchise taxes, they may be less able to compete with larger businesses with more resources. This can make it more difficult for small businesses to survive and succeed in the marketplace.

4. Compliance Costs

Small businesses may also incur additional compliance costs associated with franchise taxes. For example, small businesses may need to hire accountants or tax professionals to ensure that they comply with the specific rules and regulations governing franchise taxes in their state. These additional costs can significantly burden small businesses, particularly those with limited resources.

5. Availability of Loans

Franchise taxes can impact the availability of loans for small businesses. When businesses are required to pay significant amounts in franchise taxes, they may have less money to invest in their business or repay loans. This can make it more difficult for small businesses to obtain the financing they need to start or expand their operations.

Impact on Employees

Franchise taxes can also impact employees who work for small businesses. When small businesses are required to pay significant amounts in franchise taxes, they may be less able to offer competitive salaries or benefits to their employees. This can make it more difficult for employees to make ends meet or access healthcare, retirement savings, or other benefits critical to their financial security. Here are some of the ways that franchise taxes can impact employees:

1. Limited Wage Increases

Franchise taxes can limit the ability of small businesses to increase wages for their employees. When businesses are required to pay significant amounts in franchise taxes, they may have less money available to invest in their operations or to offer competitive salaries to their employees. This can limit the ability of employees to earn higher wages and improve their financial situation.

2. Reduced Benefits

Franchise taxes can also impact the availability of benefits for employees. When businesses are required to pay significant amounts in franchise taxes, they may be less able to offer healthcare, retirement savings, or other benefits critical to employees’ financial security. This can make it more difficult for employees to access the resources they need to live healthy and financially stable lives.

3. Job Losses

Franchise taxes can also impact the availability of jobs for employees. When businesses are required to pay significant amounts in franchise taxes, they may be less likely to expand their operations or invest in new hires. This can limit the availability of job opportunities for employees who may be seeking work in these industries.

4. Limited Job Security

Franchise taxes can also impact the job security of employees. When businesses must pay significant franchise taxes, they may be more likely to lay off employees or reduce their work hours to reduce costs. This can make it more difficult for employees to maintain a stable and consistent income, impacting their financial security and overall well-being.

How Much Revenue Comes from Franchise Taxes?

State governments levy franchise taxes and no federal franchise tax exists in the United States. The revenue generated by franchise taxes varies significantly between states, and no comprehensive data is available on the total amount of franchise tax revenue collected annually across all states.

However, some states do provide information on the revenue generated by franchise taxes within their borders. For example, in 2020, the state of Texas collected approximately $4.1 billion in franchise tax revenue, while the state of California collected approximately $9.4 billion in total corporate tax revenue, which includes franchise taxes.

Franchise taxes are just one type of tax that is levied on businesses in the United States, and the amount of revenue generated by these taxes depends on a variety of factors, such as the size and financial position of businesses subject to the tax, the tax rate set by the state, and the overall economic conditions in the state.

While no comprehensive data has been found on the total amount of franchise tax revenue paid across all states in the United States, franchise taxes are a significant source of revenue for many states and serve to fund public services and infrastructure that benefit businesses and the community.

But a little discussed issue regarding the patchwork of franchise taxes in the United States is the distortion of the free market, which allocates capital to those human enterprises that are most efficient. More on this problem is contained in A Taxing Problem, by Dr. Mitch. In his book Dr. Mitch shows that tax justice would have corporate and corporation-like entities pay taxes like living persons. Since the laws that allow these entities to exist and thrive give them attributes of personhood, they should be required to pay a small annual tax, say 2%, on net worth. The elimination of franchise tax would not only be fairer, but it would allow a significant reduction in the complexity of governments and reduction in the financial costs attendant to that complexity.  I would result in a freer market economy and substantially level the playing field of business enterprise.

In Conclusion

Franchise taxes can have a significant impact on lower-income people in the United States, both directly through higher prices and indirectly through reduced access to goods and services. This can exacerbate economic inequality and make it more difficult for lower-income people to achieve financial stability and upward mobility. Franchise taxes can contribute to the consolidation of wealth and power in the hands of large corporations, further entrenching economic inequality in American society. 

Policymakers should consider potential solutions to address the deleterious impact of franchise taxes on lower-income people that serve to tip the advantages of the economy in favor of the wealthy and limiting economic opportunity to poor and middle classes in America. Again, a deeper dive into this subject can be had by reading A Taxing Problem, by Dr. Mitch.

Excise Taxes

by Julie Johansson | Jul 17, 2023 | Uncategorized

What are Excise Taxes?

Excise taxes are taxes on specific goods or services that are typically included in the price of the product or service. Governments claim that they usually impose these taxes to raise revenue, discourage certain behaviors or activities, or to fund specific projects or programs. Excise taxes can be levied at the federal, state, or local level and are typically assessed as a percentage of the purchase price or as a fixed amount per unit.

Examples of products or services subject to excise taxes include gasoline, tobacco products, alcohol, firearms, air transportation, and specific environmental hazards. The revenue generated from excise taxes is typically used to fund specific government programs or initiatives, such as infrastructure projects, public health initiatives, or education programs.

The federal government imposes excise taxes on various products and services in the United States, including gasoline, tobacco products, firearms, and airline tickets. State and local governments may also impose excise taxes instead of federal ones.

Excise taxes can be controversial, with some arguing that they unfairly target certain products or industries and burden consumers. I say that excise taxes disproportionately affect the poor and middle class and that there are more appropriate solutions for supporting our government needs through taxes. Others say that excise taxes are an effective way to raise revenue and discourage certain behaviors that can negatively impact public health or the environment. But using excise taxing in this way is not among the most effective ways to help with public health and the environment.

In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, by Dr. Mitch, he explains how and why excise taxes are unfair and less effective than other ways to improve public health and the environment.

History of Excise Tax

Excise taxes have a long history in the United States, dating back to colonial times. The government has used these taxes to fund various programs and services, regulate certain industries, and promote public health. In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch relates in his chapter on the history of taxation other interesting facts that go beyond the history presented here.

Early History of Excise Taxes in the United States

The British government imposed the first excise tax in the United States on the colonies in 1764. The tax, which was levied on sugar, molasses, and other goods, was designed to raise revenue for the British government. The colonists were outraged by the tax, which they saw as violating their rights as British subjects. The tax was eventually repealed, but the incident served as a precursor to the American Revolution.

During the Revolutionary War, the Continental Congress levied excise taxes on various goods to fund the war effort. These taxes were often unpopular, leading to protests and even riots in some areas. After the war, the new United States government continued using excise taxes to generate revenue.

Early excise taxes in the United States were levied on goods such as alcohol, tobacco, and sugar. These taxes were often used to fund specific government programs, such as constructing roads and canals. In the early 19th century, the government began using excise taxes to regulate industries.

The Whiskey Rebellion

One of the most significant events in the history of excise taxes in the United States was the Whiskey Rebellion. In 1791, the government imposed an excise tax on distilled spirits, including whiskey. The tax was highly unpopular in Western Pennsylvania, where many farmers relied on producing and selling whiskey to make a living. In 1794, a group of farmers and distillers organized a protest which eventually turned violent. President George Washington ordered troops to the region to put down the rebellion. The rebels were eventually defeated, and the incident served as a reminder of the power of the federal government to enforce its laws.

The Civil War and Beyond

During the Civil War, the government imposed excise taxes on various goods to fund the war effort. These taxes were later extended to cover a range of industries, including firearms, telegraphs, and even playing cards. In the early 20th century, the government imposed excise taxes on automobiles and gasoline to fund the construction of roads.

In the 1930s, the government introduced a tax on alcohol to fund programs to combat alcoholism. The tax was later increased and extended to cover other goods, including tobacco products. These taxes have been used to fund various programs and services, including public health initiatives and infrastructure projects.

Recently, there has been renewed interest in using excise taxes to promote public health and combat social issues. For example, many states have introduced taxes on sugary drinks to reduce obesity and diabetes rates. Additionally, there has been increased interest in using excise taxes to address environmental issues, such as carbon emissions. However, this methodology has yet to be proven as an effective deterrence, or more effective than other legislative approaches. Some  of these alternative legislative approaches are described in A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, by Dr. Mitch.

Common Excise Tax Products

Excise taxes can apply to a wide range of products and services. Some common examples include:

• Tobacco products, such as cigarettes, cigars, and smokeless tobacco
• Alcohol, including beer, wine, and distilled spirits
• Gasoline and other fuels, such as diesel and jet fuel
• Firearms and ammunition
• Luxury goods, such as high-end cars or yachts
• Air transportation, such as airline tickets and aviation fuel
• Environmental hazards, such as chemicals or hazardous waste
• Communication services, such as telephone and Internet services
• Medical devices, such as prosthetics and pacemakers

Specific products and services subject to excise taxes can vary by country and jurisdiction. For example, the federal government imposes excise taxes on a wide range of products and services in the United States. Additionally, many state and local governments impose their excise taxes on top of federal taxes.

Why Excise Taxes are Controversial. 

Excise taxes have long been debated with advocates and opponents presenting arguments on both sides. While excise taxes can effectively raise revenue and discourage behaviors that can negatively impact public health and the environment, they are also regressive and burden low-income and middle-income consumers disproportionately.

One of the main arguments against excise taxes is that they are regressive, meaning they disproportionately affect lower-income and middle-income individuals and families. This is easily seen for excise taxes on products like tobacco, alcohol, and gasoline, which low-income consumers tend to use more heavily. 

For example, a person living in a rural area with limited public transportation may need to drive long distances to work and may require the means to purchase a fuel-efficient vehicle. As a result, a gasoline tax significantly impacts their finances, and forces them to allocate more of their income toward transportation expenses.

Similarly, taxes on products like tobacco and alcohol also impact low-income individuals more heavily, who tend to use these products more than high-income earners. Studies have shown that lower-income individuals are more likely to smoke and consume alcohol at higher levels than higher-income individuals. Even high-income earners who smoke and drink can only consume so much of these products, and the excise taxes imposed on them are less significant items in their budgets.  As a result, taxes on these products place a disproportionate burden on lower-income consumers.

Another problem with excise taxes is that they do not justify those results that are a part of their rationale. For example, taxes on tobacco products and alcohol will not significantly reduce consumption among heavy users, who are often addicted to these products. Similarly, taxes on gasoline and other fuels may not significantly reduce overall consumption or encourage public transportation, particularly in areas with limited access to these options.

Despite these concerns, there are also strong arguments favoring excise taxes. These taxes can effectively raise revenue for critical public health and environmental initiatives. In addition, taxes on products like tobacco and alcohol can help discourage excessive consumption, which can lead to various health problems and associated costs for individuals and society.  

However, no data suggest that because of the price of alcohol and tobacco, people are going without. If anything, the prices are high, and people are finding alternative ways to get alcohol and tobacco. Excise taxes are likely not to discourage excessive consumption. 

Ultimately, the controversy surrounding excise taxes in the United States highlights the difficult balancing act that policymakers must navigate when making decisions about tax policy. While excise taxes can effectively raise revenue and theoretically discourage negative behaviors, they also place a disproportionate burden on low-income consumers, who may already be struggling to make ends meet.

As a result, it’s crucial for policymakers to carefully consider the implications of excise taxes on all segments of the population and to work to mitigate their negative impacts on low-income individuals and families. In in A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch examines the inherent unfairness in this and other ways that government fund its functions and programs and proposes a solution rooted in practicality and universally held concepts of justice.

Lower Income People are Impacted the Most

Excise taxes disproportionately impact lower-income individuals, as they tend to spend a higher proportion of their income on goods and services subject to these taxes. Excise taxes increase the cost of essential goods and services, which can further strain already tight budgets. For example, suppose a person relies on a car to get to work or access essential services. In that case, an excise tax on gasoline can increase their transportation costs and reduce their disposable income for other needs, such as food or housing.

Excise taxes create unintended consequences, such as the growth of black markets for the evasion of taxes. Lower-income individuals who may already be struggling to make ends meet may turn to cheaper, unregulated products, which can be dangerous or of lower quality. Moreover, evasion of taxes leads to reduced revenue for the government, which can impact social programs and services.

How Much Are Americans Actually Paying in Excise Taxes?

According to data from the U.S. Department of the Treasury, in the fiscal year 2021 (October 2020 – September 2021), the total excise tax revenue collected by the federal government was approximately $97.3 billion. It is worth noting that state and local governments also levy excise taxes, and the total amount of revenue generated by excise taxes in the United States is, therefore, higher than the federal excise tax revenue alone. However, the specific amount generated by state and local excise taxes can vary widely depending on the state and the type of tax in question.

According to the Tax Foundation, in the fiscal year 2021, states collected an estimated $20.1 billion in excise tax revenue, with the largest categories being gasoline, cigarette, and alcohol taxes. Therefore, the total revenue generated by excise taxes in the United States (federal, state, and local) in the fiscal year 2021 is estimated to be approximately $117.4 billion.

That’s $117.4 billion taken directly out of the pockets of the poor and middle class.  In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch demonstrates how this and other ways of raising revenue for government and its programs are unfair.  How this unfairness results in the anger and frustration seen in the United States, and indeed, the world today. He demonstrates how this anger and experienced unfairness results in a more violent society. And more importantly, he provides the solution. His book is available in paperback, for download, and in audiobook formats.