Blonde moment

And the silver spoon.

Saturday, March 01, 2008

You can fool some of the people some of the time…

And Mrs. Chad T. Elder won’t buy it.

OK, I had to, but I’d sign up for a PAC against taxing clothes. Hello, expectant mother here. (Note, garage sales are THE place to go for baby clothes, but kids eventually become fashion conscious.)

So, which would you rather do… pay 6.5% as everything stands, or 5.95% on everything as it stands and also clothes? Here’s the economics question of the day for you. You will be paying a lower rate, but on more stuff. So, when you sit down and crunch the numbers, does this half percent decrease in rate really cost you less, or will it cost you more? Keep in mind all your clothing purchases that don’t come from a garage sale.

Let’s say you don’t know where to even begin to answer this question. OK, so let’s say you’re going to need to do some clothes shopping. And let’s say you do so for every season shift, but are responsible and buy stuff that has some overlap value. Save all your receipts. Then, take a typical month of your other spending (CDs, taxable food, books, stuff you pay sales taxes on… keep your receipts). Number a scrap paper from 1 to 11 and here’s what you do:
1. Add up all your clothes spending, it’s almost spring, so you will probably have some. (Let’s say $100)
2. Add up all your taxable spending, be careful if you are pulling stuff off of a Cub receipt, because most of the stuff on there isn’t taxable. (Let’s also say $100)
3. Add up all of the sales taxes that you paid under the current system. (100*0.065=$6.50)
4. Take your taxable spending and multiply that by 0.0595 (the new tax rate) (100*.0595 = $5.95)
5. Take your clothes spending and multiply that by 0.0595 (the new tax rate) (100*0.0595 = $5.95)
6. Take your answer to number 3 (your current sales tax for a month) and multiply it by 12. (6.5*12 = $78)
7. Take your answer to number 4 (your forecasted new tax rate) and multiply it by 12. (5.95*12 = $71.40)
8. Take the answer for number 5 and multiply it by four (remember, we assume four seasons, so four times you are buying clothes). (5.95*4 = $23.80)
9. Add together your answer to 7 and 8. Is it bigger or smaller then your answer to question six? If it is smaller then question six, then you are OK with paying a lower rate on more stuff. But my guess is it’s bigger, so to do a good analysis, we have one more step… (23.80+71.40 = $95.20; our number is bigger, so…)
10. Subtract number 7 from number 6; and that is your savings on stuff you currently pay taxes on. (78-71.4 = $6.60)
11. Take number 10 and subtract that from number 9. Is THIS number bigger or smaller then your answer to question number 6? If it is smaller then question six, then you are OK with paying a lower rate on more stuff. But, my guess is it’s bigger, so you should be against this new tax proposal, or should spend less on clothes. (95.2-6.6 = $88.60; this is still bigger then the $78 you would currently be paying).

Well, Liz, wouldn’t there be a time where you would be indifferent towards the tax? Sure. This requires a bit more math.

Let’s say x = spending on stuff that is currently taxable and y = spending on clothes.
Currently, the sales tax you are paying is: 0.065x+0y
The legislature wants you to pay this: 0.0595x+0.0595y
So, if you want to figure out which spending levels will give you the same cost you are paying now…
0.065x+0y = 0.0595x+0.0595y
0.065x = 0.0595x+0.0595y
0.065x-0.0595x = 0.0595y
0.0055x = 0.0595y
0.0055x/0.0595 = y
0.092x = y

So, if x = $100, in order to pay the exact same amount of sales tax, you could only spend $9.20 on clothes!

And we must remember, though this *seems* like a tax decrease, the entire point is to raise more money. As the TV show asks, “Deal, or no deal?”

As an updated aside, yes I realize I made clothes spending dependent upon other items. I did this because the tax on clothes is going up, and the tax on other stuff is going down, so naturally, it would be tempting to spend more on other stuff and less on clothes. Furthermore, one does't *need* CDs or candy; so the above example shows the strong increase in a family's budget a sales tax increase will have. A creative budgeter will make the personal decisions between how much to spend on clothes and how much to spend on other stuff. And that person will figure out how much sales tax they currently pay, and how much they will end up paying. My example isn't any good for anyones personal budgeting decisions and I certainly won't be using it in my own budgeting decisions. It is just an illustrative example on how much the tax increase stands to become. Furthermore, though I do know how to take my illustrative example and customize it to the value people place on clothes verses the value they place on other stuff (called utility), it has been a really long time since I've done it, and it doesn't advance my point that much. I'm just showing friends how to crunch the numbers and get through the political jargon. I think they can make their own budgeting decisions.


  • At 11:35 PM , Blogger pianomomsicle said...

    Wow. That's as easy a read as my W-4. Thanks for doing all the work for me! Now i know: tax=bad. Oh wait, i pretty much knew that anyway. Oh well, tax increases seem as inevitable as the eventual demise of Miley Cyrus.

  • At 11:41 PM , Blogger pianomomsicle said...

    P.S. Do you want to go garage saling with me this year? i'll get Kris to watch David. At the junior high i think in July they have a baby gear and clothes bazaar, like a giant baby garage sale. There is also something like that at St. Mark's (? or John's, or Luke's) in Bloomington i think around the same time.
    i can't wait for garage sale season! i've saved all my change this past winter just for G.S. Season, as i call it.

  • At 7:23 AM , Blogger Liz said...

    Sounds like a deal! We'll have to go!


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