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How much are you paying in tax every time you go to the store to make purchase? Most states charge a sales tax on all purchases that occur inside the state. Certain towns and counties may levy an additional sales tax on top of that. But what about that hidden tax that is not going to the government? What about the tax you are paying to the credit card companies for every single transaction you make -- whether you are using their credit card or not?
How Are Credit Card Processing Fees a Tax?
Did you know that merchants can be paying anywhere from 2-5% to Visa or MasterCard for the privilege of accepting your payment? Discover and American Express charge even higher rates.
Instead of taking these fees off the top of the profit margins on goods and services, businesses simply charge you a higher price and pass those processing fees on to their customers.
And Investopia defines taxes as:
"Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities. In economics, taxes fall on whomever pays the burden of the tax, whether this is the entity being taxed, like a business, or the end consumers of the business's goods.”
Based on that definition, every time you use your credit card to make a purchase, you are paying a tax to a credit card company. Okay ... technically, the merchant is paying a credit card processing fee. But it works like a tax on your consumption.
These fees are especially burdensome for small businesses who cannot negotiate the best rates, businesses with small profit margins (such as grocery stores), and online businesses charged the highest processing fees.
In essence, every time you make a purchase you pay a tax to Visa and MasterCard.
Market Power of the Oligopoly
The credit card companies have a form of competition that is known in economics as an oligopoly. When a market is organized as an oligopoly, there are a few very large firms that control the market competition and pricing. Their level of control over the market creates a high barrier to entry for any other business that would want to enter the market. These few firms tend to earn abnormally high profits because they can either explicitly or implicitly work together to keep prices high.
Visa and MasterCard have essentially kept their processing fees the same over the past fifty years. Certainly they are processing more transactions than ever and face new challenges every day due to the increased attempts to attack their systems and need to detect fraudulent activity.
However, the cost of processing a single transaction is minuscule compared to fifty years ago. Consider the increase in computer processing power and the decrease in cost for technology during that time. You hold more processing power in your phone than Visa and Mastercard’s first computers.
The fees don’t make sense today, but these companies have a hold on the market that does not seem to be at risk despite new methods of processing payments. Even payment systems such as Apple Pay, Paypal, and Stripe utilize the Visa and Mastercard processing networks.
Although there are a number of new systems that bypass Visa and MasterCard’s networks for transferring cash, they are subject to other inefficiencies in the banking system. Plus, businesses are not inclined to offer all of these payment alternatives to customers in an attempt to keep transactions as quick and simple as possible.
What This Hidden Tax Means for You
Since these processing fees get passed down to you, consider that the price you pay for every item you purchase is 2-5% higher then it would otherwise be. The Merchants Payments Coalition estimates that these fees create an average tax of $400 per person each year paid to Visa and MasterCard. Unfortunately, you are paying this consumption tax to the credit card companies regardless of whether or not you are paying with cash, check, or credit card.
The tax is simply a part of the price, and like a sales tax, you pay the same amount of tax whether you make $20,000 a year or $200,000 a year. The more you buy, the more tax you pay. Differential pricing for cash and credit transactions is against the contract the merchant has with Visa and MasterCard.
Unlike sales tax or income tax, however, you get almost no benefit from the tax dollars you pay. You are not paying for schools, police, or roads. Your consumption tax just benefits the credit card companies and their shareholders.