“Protecting” Consumers from the Truth About the Cost of Government

Thom Lambert —  26 January 2012

A new rule kicks in today requiring airlines to include all taxes and mandatory fees in their advertised fares.  The rule, part of a broader “passengers’ bill of rights”-type regulation promulgated by the Department of Transportation, is being sold as a proconsumer mandate:  It purportedly protects consumers from the sticker shock that results when they learn that the true consumer price for a flight, due to taxes and mandatory fees, is much higher than the advertised price.

But how consumer-friendly is this rule?  Won’t it be easier to raise taxes and fees when they aren’t presented as a line item, when consumers aren’t “startled” to see the exorbitant amount they’re paying for government services?  Value-added taxes (VATs), which tax the incremental value added at each stage of production and are generally included in the posted price for an item, have proven easier to raise than sales taxes, which are added at the register.  That’s because the latter are more visible so that increases are more likely to generate political opposition.  While VATs are common throughout Europe, they’re virtually non-existent in the United States, in part because we Americans have recognized the important role “tax sticker shock” plays in creating political accountability.

Consumer advocates, nevertheless, are lauding the new Department of Transportation rule.  They don’t seem to realize that higher taxes are bad for consumers and that taxes are more likely to rise when the government can hide them.  They also seem to care little about consumer sovereignty.  Don’t consumers have a right to know how much they’re paying to have scads of Homeland Security officers bark orders at them and gawk at their privates?

 

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

8 responses to “Protecting” Consumers from the Truth About the Cost of Government

  1. 

    BDG–

    Thanks for the comment. I assume you’re referring to your article, Hidden Taxes, 89 Wash U L Rev 59 (2009). (I give the cite so that others may see your work.) I’ll give your article a read. My point was simply that there’s a value to “tax sticker shock” — it reminds people how much they’re paying for various government services and will tend to increase political accountability. I’ll admit that my argument was intuitive, and intuitions must bow to evidence. Sounds like you have evidence (and perhaps other intuitions) that counter my claim.

    I look forward to reading what you have to say about the matter.

    Thom

  2. 

    Thom, I’m not sure what evidence you think supports your claim that sales taxes (by which I take you to mean consumption taxes that have the tax portion of price separately stated) are more difficult to raise. When I wrote my review of the literature on this very topic two years ago, there was no such evidence. Sales taxes have gone up, for example, in most of the U.S. states over the past few years. And, I suggested, basic public choice theory arguably points the other direction: more visible taxes can result in greater free riding (i.e., *less* political opposition), because in the case of low-salience taxes the most sophisticated opponents of the tax know they cannot rely on the general public for support.

  3. 

    Nothing prevents the seller from including that information “total fare $1496 (includes $696 federal and state taxes)

  4. 

    In the EU at least the ruling only applies to the advertised overall prices, the customer still gets to see the line items when booking and on his documentation.

    It was introduced to prevent airlines from advertising 10 Euro flights that actually cost 100 Euros after all the taxes, surcharges, etc. (most of which the airlines invent themselves).

    E.g. A Ryanair flight might be a 10 Euro base price, with 50 Euro in “surcharges” invented by the airline, and on top of that 20% VAT, on top of that a 10 Euro booking fee, 10 Euro payment fee, 10 Euro delivery fee (for an e-ticket), etc. etc.. That’s been put a stop to.

    It’s not a law that prohibits airlines from listing taxes and fees as individual line items on their booking forms, and they all do to show they’re really not the ones responsible for the high prices they charge (even if a lot of the “taxes” listed aren’t taxes at all but inventions by the airlines themselves.

  5. 

    I am not so sure increased taxes will automatically be reflected in political opposition at the polls. For example, I remember receiving my first paycheck at my first job. I opened it up only to find that about 40% of my gross earnings were taken away for things like social security and medicare. The difference between my gross pay and my net pay was shocking. I then went around to all of my co-workers asking them to share their thoughts. They were mostly indifferent. Then I posed a hypothetical: Imagine if the government forced you to write them a check for these things rather than automatically deducting it from your gross pay. They all responded that their reactions would be very different. They would protest and refuse to send government 40% of their earnings. But that is what is already happening.

    So, people presumably understand how taxes affect their income, but, provided it is done in a way that doesn’t impose upon them the obligation of having to “affirmatively” pay, then everything is okay.

    People know what a sales tax is. But it is imposed even before the exchange is completed. There is nothing they can really do about it. So, in that sense, the effect would be the same if the sales tax were 3% or 22%. If, however, people were forced at the end of the year to pay the total amount of sales taxes that they accumulated during that calendar year, then I imagine their reactions would be very different. But the effect is the same. People just lump the cost of the tax with the total amount they have spent on the item they are purchasing. They don’t think of a tax as something seprate from the value of the good.

    So, the problem is not so much with the LEVEL of taxation or its VISIBILITY, but rather with the WAY IN WHICH they are imposed. In other words, if the tax is imposed in a way that doesn’t force people to affirmatively do anything, such as writing a check, then you won’t get much of a rise out of people. Government has figured this out. The battle has already been lost.

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