Discuss local, state, federal taxation of a good Essay

Discuss local, state, federal taxation of a good - Essay Example This has produced a corresponding decline in the effectiveness of the tax as a revenue raiser, because the demand for goods has declined. Demand for services has risen, but services have been excluded from the base of taxable items, hence it does not contribute to state revenue. The shift in consumer demand from goods to services may be due to the taxation of goods as opposed to non taxation of services. But Tannenwald (2002) notes that cyclical influences can also shape demand, which may lead to an increase in State revenues. The explanation offered for this phenomenon is that tax consumption is more pro-cyclical than tax preferred consumption. When interest rates are low and the stock market is strong, consumers tend to spend freely on taxed items, which results in a boost to the economy and contributes a greater share of funds to State revenues. But as consumers continue to spend more on taxed goods, the level of savings also goes down because consumer debt keeps increasing. As consumer debt rises to a high level, there is a shift in consumer demand from taxed goods to untaxed services, which results in a contraction of the economy and a decline in the revenues earned by the State.(Tannenwald, 2002). With an increase in outsourcing and the production of goods at cheaper locations, consumers may still prefer to spend on taxed items because the goods overall have become cheaper, so that despite the tax the goods may still be priced at competitive rates (Tannenwald, 2002). Taxes play an important role in the final price of the product, since a higher tax on a particular good will make it less attractive for consumers to purchase, since the price of the good in the marketplace will be higher. In such a case, when the economy is strong, there may be adequate sales of taxed goods but when consumer debt rises and the tax remains high, the shift in consumer demand to services will result in a fall in