Tax pyramiding

Taxes are both controversial and complex, and there are many special terms that have been developed to describe them. A new tax term is tax pyramiding. What does it mean? N.C. State University economist Mike Walden explains.

“First of all before I answer …, let me give you a little background. If we look at most products and services in our economy they are produced through what we call supply chain. Let’s take a home, for example. If you’re building a home, trees are going to be lumber is going to be used. So you can go back to the supply chain and say it really starts with the trees being cut, trees being sent to the saw mill, those products being sent to the lumber yard and then finally the construction site.

“And then, of course, people buy their home. What tax pyramiding refers to is, you can put a tax at various stages of that supply chain and that the tax that you put at earlier stages can sort of balloon or pyramid until you get to the final stage. For example, if you impose a tax, let’s say on the sawmill, that sawmill producer will consider that tax a cost. And … he will pass that on. And it will actually effectively show up in the price of your home.

“Or, for example, sometimes what we have is a tax on a tax. You may have a tax at the sawmill level. You may have a tax at the lumberyard level. You may have a tax at the construction site. And so again, all of those would get bundled together, and the consumer would ultimately pay them as part of the price of a home.

“I think where economists worry here is that what you get with tax pyramiding is a loss of transparency. The final buyer cannot always see the amount of the tax that he or she pays. And many economists think that whatever you think about taxes, it’s good for people to know how many taxes they’re paying.”