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Thursday, August 26, 2010

Bad Idea: 1% "Sales Tax"

Creating a (potentially costly) book keeping nightmare for frum Lakewood businesses to grab a 1% "sales tax" in the name of tuition is simply a bad idea that could prove popular and possibly catch on should cooler heads not prevail.

Small businesses will soon be hit by other headaches and/or costly requirements hidden in recent legislation such as the new 1099 requirements (a subject for another post). Many small businesses do not currently have the proper accounting and technological support to meet such a requirement and will need to increase their overhead to meet compliance requirements. Sticking frum businesses with another layer of red tape strikes me as insensitive to the challenges that businesses must meet.

The potential to drive away business from already costly business is yet another concern. Even if we pretend that frum Jews are not price sensitive out of a sense of support for the frum owner, I think we can safely assume that non-Jews that might patronize a business are price sensitive. If there is one thing that is needed more than anything else in the Ortho-economy it is outside money. Driving away new blood to chase after a $1000 donation for every $100,000 of inventory sold is short-sighted.

A third issue is the lack of real ability to enforce such a requirement (and just wait until accusations start flying).

And a fourth, and very major concern is one of privacy! Privacy should always be respected, and I think that so long as a business owner who isn't asking for tzedakah funds for their own tuition, he/she should not be put in a position that other are not put in, namely being forced to reveal private information (which a tax on sales will clearly reveal).

I don't enjoy "knocking" ideas that are put into the public square, but someone needs to sound the economic whistle. Just one (wo)man's warning. Take it and promote it, or leave it.


Anon1 said...

How are the funds to be distributed in the fairest, most productive way, with the lowest possible administrative costs? Are the beneficiary institutions to open up their books for inspection?

Perhaps it's the institutions that are best run and least in trouble that need the community support---so they can serve more students.

Meag said...


I'm a bookkeeper and the new 1099 requirements are going to make me crazy. I really hope something is done to reverse the new rule. I don't want to have to issue Office Depot a 1099, for heaven's sake.

Out of curiosity, are you an accountant or a bookkeeper?

Orthonomics said...

Meag--Both of the above, plus more. I have experience in internal audits, outside audits, fraud/investigation, tax, setting up accounting system, and day to day book keeping.

Since I have at least one interested reader, I will make another tax post about the 1099 requirements. There is some chance of repeal, or at least making the requirement only apply to cash/check purchases.

Orthonomics said...

Oh, I don't mean to make myself sound like a financial extordinare because I'm not. I just happen to have done a lot of things over the years.

Meag said...

If you don't mind my asking, did you major in accounting, or did you go back to school for it? I sort of...fell into bookkeeping post college, and I really enjoy it. I'm toying with the idea of going back for a CPA in a few years.

Orthonomics said...

I have a BA in Accounting and Business Administration.

I think going the book keeping route is a good way to test the waters and see if you want to get an accounting degree. There were a lot of "older" people in the accounting department who had worked in book keeping and they had a great basis for accounting. The CPA track is a good one, but there are other opportunities too. I think a school is good recruiting is key. My schools had a lot of recruiting from both industry, the Big 8/6/5/4 and regional and local firms, and government (FBI, Border Control).

CJ Srullowitz said...

I don't think there is a need to comment on every cockamamie idea that has been put forward. Seems like the author got bit by the Obama bug.

Anyway, from the comments on matzav, no one there seemed to like the idea either.

Miami Al said...

I like the idea... if people comply, it's going to generate "communal" funds, and the costs are split between the merchant and the customer (economic theory, depending on elasticity of demand, the breakdown between the customer and the merchant). The shopkeeper would presumably get the tax write-off, which would help cushion the blow a little bit.

If we think that the community has the obligation to fund Jewish education, this makes sense.

If we think that the parent has the obligation to fund Jewish education, this makes no sense.

However, apparently, we believe that the other people in town with children approximately the same age as the child are obligated to fund their education (current scholarship system), and that makes NO sense.

Orthonomics said...

Thanks for your comment. The reason I did comment was because I've heard similar ideas throughout the years. Right now I've been answering questions about the 1099 red tape, so this just fit right into things I've been thinking about.

Thanks for reading!

Orthonomics said...

Miami Al-The deduction the shopkeeper would get is the same one you and I get on Schedule A.

Miami Al said...

Orthonomics -- Depends on the business structure. If it's a sole proprietorship, doesn't it flow out on Schedule C, or does the contribution "pass through" to schedule A (and become subject to the 2% threshold + AMT).

I know donations inside an S-corp, are passed through to Schedule A via the K-1, so I'm guessing a sole proprietorship does the same?

What I mean economically was:

Shopkeeper A participates in this voluntary tax, Shopkeeper B does not. All things being equal, A's prices will be 1% higher. If customers are completely inelastic to 1%, then he charges the same plus the 1% "levy." If customers are completely elastic, he needs to drop prices 1% so after the "levy," he prices the same as B.

In the real world, it's somewhere in the middle. The shopkeeper probably ends up dropping prices 0.5% (at least over time, less increases, etc), charges the 1% tax, so 0.5% is paid by customers, 0.5% is paid by the merchant... the merchant gets the entire 1% deduction worth 0.15% - 0.35% of the amount.

That's what I mean by it getting split.

Same reason that when you increase cigarette taxes by $1/pack, prices don't go up $1, they go up 80 cents or so, because demand is someone inelastic, but not completely.

Ariella said...

Bad idea period. That is shifting the burden of fundraising on the store owners and shifting a financial burden on all consumers. When it comes to the purchase of costlier items, they may consider going elsewhere to avoid the tax.

Anonymous said...

This still ignores the fundamental issue -- if you want private school for all and large families, then you need for most of the community (moms and dads) working in jobs with above average salaries and getting the training or education to get those jobs, and that many of those jobs have to be ones that bring in fresh money from outside of the community.

Avi said...

I'm just curious if anyone has even the slightest idea of how much a 1% tax from a limited number of local vendors who agree to participate would raise. How would the money get divided up? Isn't the fact that they actually got a psak not to open the schools enough to show that throwing money at mismanaged schools is not the answer?

RW Orthodoxy has an income problem. Yes, there is some conspicuous consumption, but a lot of the population is dirt poor and on federal assistance. If you want families of 4 - 10 children and private schooling, even if that schooling is extremely inexpensive, you need significant income levels. The current generation has been taught a negative work ethic (working itself is wrong - you should be studying Torah) and has not prepared itself for careers with significant income levels. The crisis here is that the whole system is a house of cards and completely unsustainable.

MO has a completely different problem: expenses. We all want to live in tree-lined suburbs and send our 2 - 5 children to expensive prep schools. That, too requires massive income levels - which some MO have attained, and to which everyone else seems to feel entitled to imitate to a degree. Tuitions have risen much faster than inflation for two decades, and it with the community becoming more successful and insular, outside funding is no longer available. But discretionary spending has also risen much faster than inflation: everyone needs two recent model cars, takeout, smartphones with data plans, cable TV, and sleepaway camps. Neither the schools and the parents are willing to make sacrifices, so we have a "crisis." If tuition was $10K/year and people lived more simply the crisis would go away. There are many practical challenges to getting from here to there - it may actually be impossible, and the system may, in fact, collapse. But if MO schools do fail, it will be for completely different reasons than these RW schools. The MO world could be self-supporting. The RW world, not so much.

tesyaa said...

Don't merchants that participate in school scrip programs already do this, to a very small extent? They give a discount on merchandise bought, not to the customer, but the school. I know some smaller merchants dropped out of scrip programs for this reason, but big local frum vendors participate year after year.

alb said...

I don't live in the Lakewood area, but if the frum stores I shop at would start doing this, it's entirely possible I'd stop shopping at them. My main reason for patronizing those stores in the first place is that certain products are cheaper there - if they lose that edge, why would I continue to go out of my way to shop at the frum stores? I don't make enough money to shop at frum stores just because they're frum.

Mike S. said...

Is the shortfall in funds really only 1% of what Lakewooders spend in frum stores? If so, it is preposterous that this is even a problem. I don't believe there is anyone on such a careful budget that they can't find an extra 1% for Torah education, an activity they at least claim is the highest priority of the community. If not, the idea generates a lot of paperwork and administrative headaches without seriously addressing the problem. Who would administer the funds and what schools will be eligible? If you are an "earner" how would you like to pay a tax to support schools that reject your kids and those of others who work to support themselves? Or if you are a "learner", would you not resent paying an added tax on your groceries to support people who should be able to pay tuition on their highr income?

Anonymous said...

This could raise antitrust issues--from the U.S. government's perspective, this idea would basically mean that a bunch of competitors in the kosher food/judaica sector would collude to increase prices, which would be a violation of the Sherman Act.

megapixel said...

I wonder how much abuse this "system' would get by those that "run" it.
Also, as mentioned previously, parents that were rejected from schools have no desire to support said schools.

Anonymous said...

I think you mean FOURTH, not FORTH!

(a yeshiva guy who knows how to spell)