Editorial
Keep the Penny; Dump the Sales Tax
A penny for your thought? Or must we now round down the value of thoughts to zero?
by Fred E. Foldvary, Senior EditorThere have been proposals to stop minting pennies and stop calculating prices in pennies. Representative Jim Kolbe of Arizona recently introduced the Legal Tender Modernization Act in Congress to reduce the use of pennies. Retail sales prices would be rounded to the nearest five cents. Besides saving the cost of making pennies, rounding to a nickel would save customers and sellers the trouble of dealing with pennies. The bill has been assigned to the House Financial Services subcommittee.
The United States mint produced 14.3 billion pennies last year, a bit more than half of the 28.1 billion coins it made. Each penny costs eight-tenths of a cent to make.
If half the time the price were rounded up and half the time down, it would even out, but would sellers round down as often? It is possible that they would adjust prices so that they mostly round up, at the expense of buyers. A penny saved would be a nickel earned.
In some states, there is no sales tax on food, and retailers used to ending prices in 9, such as 59 cents or 99 cents, might round up to 60 cents or a dollar. Another problem is that there would be huge transition costs. All cash registers would have to be reprogrammed to round the price to a five-cent basis.
Many transactions today are not for cash, but paid by check, credit card, and electronic payments. These would continue to be paid at the exact amount, to the penny. So for many sales, there would be two different prices, one for cash and one for non-cash.
Once legislation goes in a certain direction, subsequent acts push it along further, so to eliminate the confusion of two prices, Congress might later decide to force all sellers to price all items so that the last digit is 0 or 5 and require all States to increment the sales taxes by 5 cents to make after-tax prices also end in either a 0 or 5.
Americans for Common Cents is opposed to eliminating the penny. This coalition represents over 50 organizations that support keeping the penny, including charities that rely on spare change. Its executive director, Mark Weller, says that consumers could be hit with a $600 million rounding tax every year by this legislation. It would cost us a pretty penny.
One main reason for the penny is sales taxes, which make prices end in random digits. Rather than dumping the penny, we should dump sales taxes. Without sales taxes, some merchants could voluntarily round prices to the nickel. Many would probably not, because of the temptation to create the illusion of lower prices by ending the price with the digit 9. Somehow, 99¢ seems much cheaper than $1.00. Whether merchants would round to the nickel would depend on whether they would profit more for by selling more at 99¢ or by eliminating the cost of handling many pennies.
There are two reasons for having sales taxes. The main reason is to split taxation into different types in order to create public-finance illusion. Splitting taxes into both sales and income makes it seem that taxes are not as high as when there is only a sales tax or only an income tax. The second reason for having a sales tax is to force the poor to pay more taxes, since the poor often pay little or no income taxes. Both of these are bad reasons. They serve government and privileged interests, not the public.
Sales taxes have an excess burden, a cost to society beyond the amounts paid in tax. The tax makes goods more expensive, reducing the quantities bought. This prevents some resources from going to where people most want them. Economists call this a "deadweight loss."
We don't need stinking sales taxes. Sales taxes are an intervention between a willing buyer and seller. Sales taxes violate the freedom of contract and are involuntary servitude.
The States can get sufficient revenues if they charge landowners the rental value of services provided. Freeways, streets, parks, security, fire protection, schools, and libraries increase the value of real estate, and the owners should pay this value back to the government that creates it. Social harms such as pollution and congestion should also be charged for. These charges would not have an excess burden and would be consistent with justice.
Eliminating the penny to serve a regressive, costly, unjust sales tax is absurd. Precision in pricing can be a good thing. It's the sales tax that is the problem. Dump the sales tax and keep the penny.
Copyright 2001 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
| For more on the sales tax, see another Foldvary editorial and Mason Gaffney's list of Sales Tax Suicides |
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