Sale Tax is regressive

[swamplizard]

Greetings fellow politicos,

Sales Tax is regressive in nature and application. It effects the poor much more heavily than the rich, while supplying revenues to the state. Solution: implement or increase the Income Tax on the wealthy or reduce the Sales and Usage Tax to only luxury items.

 

[Fanatical Meat]

Tough question swapy, to me sales tax is fine provided stuff you have to own like food and clothes and a few other things are exempt. Cutting sales tax would leave a hole that would need to be filled with another tax. New taxes tend to have unexpected outcomes.

 

[swamplizard]

Tough question swapy, to me sales tax is fine provided stuff you have to own like food and clothes and a few other things are exempt. Cutting sales tax would leave a hole that would need to be filled with another tax. New taxes tend to have unexpected outcomes.

Hi Fanatical Meat,

I have worked in the taxation industry for considerable time and I am convinced that elimination of the Sales Tax would increase actual sales and revenues in the state. With the turnover rate of the dollar this multiplies to a significant degree. There are 6 states without an income tax and 5 of them rely heavily on sales tax (Alaska has no tax on anything, more on that later). An upper level income tax increase would supply the needed revenues for the state treasury since these would benefit greatly from an elimination of sales and usage tax.

While we're at it, I also propose an exemption on property taxes that would substantially help the lower income families. But that is a topic for another thread.

Thanks for responding.

 

[fskimospy]

Greetings fellow politicos,

Sales Tax is regressive in nature and application. It effects the poor much more heavily than the rich, while supplying revenues to the state. Solution: implement or increase the Income Tax on the wealthy or reduce the Sales and Usage Tax to only luxury items.

I would personally like to do the opposite and entirely eliminate the income tax and dramatically increase the sales tax. Sales taxes don't HAVE to be regressive, they are just regressive in their current form. We could offer a 'prebate' up to a certain level which would basically exempt people from the first X dollars of sales taxes you would pay each year. For the poor this could be more than 100% of their taxes, for example.

 

[Bowfinger]

I would personally like to do the opposite and entirely eliminate the income tax and dramatically increase the sales tax. Sales taxes don't HAVE to be regressive, they are just regressive in their current form. We could offer a 'prebate' up to a certain level which would basically exempt people from the first X dollars of sales taxes you would pay each year. For the poor this could be more than 100% of their taxes, for example.

Sales taxes are always regressive. A prebate merely raises the tipping point. As incomes increases, one spends proportionately less on taxable goods and services. Also as Swamplizard suggests, sales taxes discourage spending which dampens the economy. (They do encourage saving, however.)

 

[fskimospy]

Sales taxes are always regressive. A prebate merely raises the tipping point. As incomes increases, one spends proportionately less on taxable goods and services. Also as Swamplizard suggests, sales taxes discourage spending which dampens the economy. (They do encourage saving, however.)

This is not accurate. Do a thought experiment on it: Say the prebate covers your first $25,000 of spending and after that the sales tax is 50%. (just made up numbers for ease of use) If you made/spent $25,000 that year then you pay $0, a 0% tax rate. If you made/spent $50,000 that year you pay $12,500, which is a 25% tax rate. If you made/spent $100,000 that year you paid $37,500, which is a 33% rate, and so on. How is that anything but progressive?

Sales/value added taxes are consumption based taxes which research shows are the most economically efficient ones. A more efficient tax system is a good thing, and something we should work towards.

 

[Bowfinger]

This is not accurate. Do a thought experiment on it: Say the prebate covers your first $25,000 of spending and after that the sales tax is 50%. (just made up numbers for ease of use) If you made/spent $25,000 that year then you pay $0, a 0% tax rate. If you made/spent $50,000 that year you pay $12,500, which is a 25% tax rate. If you made/spent $100,000 that year you paid $37,500, which is a 33% rate, and so on. How is that anything but progressive?

Sales/value added taxes are consumption based taxes which research shows are the most economically efficient ones. A more efficient tax system is a good thing, and something we should work towards.

If you made $1 million, spent $125K, and paid $50K in taxes, that's a tax rate of 5%. Poor people spend everything they make; rich people do not. As incomes increases, one spends proportionately less on taxable goods and services.

 

[NAC4EV]

IMO A Point of Sale Tax is fairer than Income Tax.
Rich pay more tax because they buy more.
It's harder to tax shelter a point of sale tax.

 

[fskimospy]

If you made $1 million, spent $125K, and paid $50K in taxes, that's a tax rate of 5%. Poor people spend everything they make; rich people do not. As incomes increases, one spends proportionately less on taxable goods and services.

What do you mean taxable goods and services? In a consumption tax scenario basically everything is taxed. Food, housing costs, etc. If we kept our classifications for what is subject to sales taxes identical to what we have now the system I mentioned would be substantially less progressive than in my example, although it would still be progressive. There's no reason to keep the items subject to consumption taxes the same though and no consumption tax plan that I am aware of does so.

 

[DrPizza]

I may be mistaken, but aren't you allowed to not take your standard deduction, and instead, deduct all of the sales tax that you paid during the year? Or at least, something like that? I.e., isn't the standard deduction set to be something similar to what the average person pays in sales tax? If that's the case, then the OP's point is moot.

http://www.bankrate.com/finance/taxes/take-advantage-of-the-sales-tax-deduction-1.aspx

More or less.
So, take the standard deduction. But, if you itemize, you can't. If you itemize, you can deduct all the sales tax instead.

Thus, in the form of the standard deduction, the poor are sorta getting back more than people who make more money, but still don't have enough deductions to itemize.

 

[soulcougher73]

Id rather eliminate income tax and only have sales tax, except on food and other necessary type items for living. Let us have more of our money to spend, or not. Plus the gov would need to spend less also, which im also fine with.

 

[Bowfinger]

What do you mean taxable goods and services? In a consumption tax scenario basically everything is taxed. Food, housing costs, etc. If we kept our classifications for what is subject to sales taxes identical to what we have now the system I mentioned would be substantially less progressive than in my example, although it would still be progressive. There's no reason to keep the items subject to consumption taxes the same though and no consumption tax plan that I am aware of does so.

So what are you prepared to tax. Home and other property purchases? Investments? Savings? Trusts? Charitable donations? Salaries you pay? Stuffing it under a mattress?

If your plan is to tax literally every single thing one might do with a dollar, you've effectively created a new income tax, only with countless collection points instead of an annual return. If any form of savings, investment, or profit-making activity is exempt from your tax, that's where the rich will shelter their income. Poor people spend everything they make; rich people do not. As incomes increases, one spends proportionately less on taxable goods and services.

 

[fskimospy]

I may be mistaken, but aren't you allowed to not take your standard deduction, and instead, deduct all of the sales tax that you paid during the year? Or at least, something like that? I.e., isn't the standard deduction set to be something similar to what the average person pays in sales tax? If that's the case, then the OP's point is moot.

If I understand it correctly in states that don't have income tax you can instead deduct sales taxes paid. Both of these are itemized deductions though so by definition you couldn't take the standard deduction with them.

 

[Cozarkian]

This is not accurate. Do a thought experiment on it: Say the prebate covers your first $25,000 of spending and after that the sales tax is 50%. (just made up numbers for ease of use) If you made/spent $25,000 that year then you pay $0, a 0% tax rate. If you made/spent $50,000 that year you pay $12,500, which is a 25% tax rate. If you made/spent $100,000 that year you paid $37,500, which is a 33% rate, and so on. How is that anything but progressive?

Sales/value added taxes are consumption based taxes which research shows are the most economically efficient ones. A more efficient tax system is a good thing, and something we should work towards.

Your thought experiment is changing the assumption of how much is spent on goods by each taxpayer. That has to remain constant - each taxpayer must purchase the same set of goods to determine whether it is progressive as a percentage of income. Assuming 25K in spending with 50% tax rate.

No prebate (25K spending = 12.5K tax).
40K income = 31.25% of total.
80K invome = 15.63%

With 20K prebate (2.5K tax)
40K income = 6.25%
80K income = 3.13%

 

[fskimospy]

So what are you prepared to tax. Home and other property purchases? Investments? Savings? Trusts? Charitable donations? Salaries you pay? Stuffing it under a mattress?

Yes, taxing housing is one of the most important parts of any consumption tax. You don't tax savings and investments though, as those aren't consumption.

If your plan is to tax literally every single thing one might do with a dollar, you've effectively created a new income tax, only with countless collection points instead of an annual return. If any form of savings, investment, or profit-making activity is exempt from your tax, that's where the rich will shelter their income. Poor people spend everything they make; rich people do not. As incomes increases, one spends proportionately less on taxable goods and services.

Of course you don't tax everything, as previously mentioned. There's also no need to tax all consumption at equal rates and you could have a progressive system as consumption increases taxes increase. Poor people spending everything they make isn't an issue because the prebate takes care of that, etc.

If you want to haggle over the details that's fine, but there is absolutely no reason why you couldn't have a consumption/expenditure based tax system that was as progressive as our income tax system or even more so. To say otherwise is nonsense.

 

[MongGrel]

Hi Fanatical Meat,

I have worked in the taxation industry for considerable time and I am convinced that elimination of the Sales Tax would increase actual sales and revenues in the state. With the turnover rate of the dollar this multiplies to a significant degree. There are 6 states without an income tax and 5 of them rely heavily on sales tax (Alaska has no tax on anything, more on that later). An upper level income tax increase would supply the needed revenues for the state treasury since these would benefit greatly from an elimination of sales and usage tax.

While we're at it, I also propose an exemption on property taxes that would substantially help the lower income families. But that is a topic for another thread.

Thanks for responding.

Yeah, FL is one of the states with no state tax, sales tax are a big deal here as tourism in general brings in a large amount of money due to that.

I remember in the early 80's when I was working in HQ/S1 at the time in the military it was unusual when I saw people from Alaska actually receiving large tax refund checks from the state at the time, just from having that as a state of residence.

 

[fskimospy]

Your thought experiment is changing the assumption of how much is spent on goods by each taxpayer. That has to remain constant - each taxpayer must purchase the same set of goods to determine whether it is progressive as a percentage of income. Assuming 25K in spending with 50% tax rate.

No prebate (25K spending = 12.5K tax).
40K income = 31.25% of total.
80K invome = 15.63%

With 20K prebate (2.5K tax)
40K income = 6.25%
80K income = 3.13%

Why would each taxpayer have to purchase the same set of goods? That's nonsensical as it has no bearing on how the world actually behaves.

In life as someone's income increases their consumption increases. This can easily be seen anywhere in the world. Therefore as someone's income and consumption increase they will buy more things, increasing the share of taxes paid as a percentage of their income.

Your example only makes sense if we live in a state of antlike conformity where people's consumption preferences are static. If that were the case what would be the point of making more money anyway?

 

[DrPizza]

If I understand it correctly in states that don't have income tax you can instead deduct sales taxes paid. Both of these are itemized deductions though so by definition you couldn't take the standard deduction with them.

But, more or less, wasn't the idea of the standard deduction to allow people to deduct their state sales or income tax, if they weren't able to itemize? (And based on a more or less average number?)

 

[Bowfinger]

[ ... ]You don't tax savings and investments though, as those aren't consumption. ...

If you don't tax savings and investments, you cannot have a truly progressive tax. Full stop. As incomes increases, one spends proportionately less on taxable goods and services, and puts more in savings and investments. Millionaires will pay a lower total rate than the middle class, Multi-millionaires will pay a single-digit effective rate because the great majority of their dollars will go to investments.

There's also no need to tax all consumption at equal rates and you could have a progressive system as consumption increases taxes increase.

Explain how this works in the real world. If Daddy Bigbucks stops by my kiosk and buys a pair of sunglasses, how am I supposed to know how much consumption he's doing? How do I know I need to charge him a higher rate than the college kid with his part-time job who buys the same sunglasses?

Poor people spending everything they make isn't an issue because the prebate takes care of that, etc. ...

As I said, a prebate merely changes the tipping point. The tax still becomes regressive as income increases.

but there is absolutely no reason why you couldn't have a consumption/expenditure based tax system that was as progressive as our income tax system or even more so. To say otherwise is nonsense.

Just the opposite. It's nonsense to insist a sales/consumption tax can be as progressive as an income-based tax, at least in the real world. It doesn't work.

 

[Cozarkian]

If you want to haggle over the details that's fine, but there is absolutely no reason why you couldn't have a consumption/expenditure based tax system that was as progressive as our income tax system or even more so. To say otherwise is nonsense.

It is practically impossible because of the record keeping involved. It would require individuals to keep an accurate record of every purchase they made and to fairly report it, or alternatively, to provide a SSN for every purchase made so that the sale could be reported by the vendor.

 

[Zaap]

Rich pay more tax because they buy more.

LOL! I *love* this automatic assumption.

It's hilarious to me anyone really with a straight face thinks you're gonna replace income taxes with sales taxes off the backs of a tiny fraction of people, who are wealthy enough to be highly mobile in the spending habits they do have.

"But they automatically visibly spend more!"

 

[Bowfinger]

[ ... ]
In life as someone's income increases their consumption increases. ...

Generally true, I agree, but it is not a linear relationship. Not even close.

 

[Ken g6]

IMO A Point of Sale Tax is fairer than Income Tax.
Rich pay more tax because they buy more.
It's harder to tax shelter a point of sale tax.

That's the faulty assumption behind trickle-down economics. After a point, the rich don't buy more - at least not as a percentage of their income. They just invest more, and the rich get richer.

 

[fskimospy]

If you don't tax savings and investments, you cannot have a truly progressive tax. Full stop. As incomes increases, one spends proportionately less on taxable goods and services, and puts more in savings and investments. Millionaires will pay a lower total rate than the middle class, Multi-millionaires will pay a single-digit effective rate because the great majority of their dollars will go to investments.

This is not how progressive taxation is defined. Progressive taxation is simply that as someone does more of the activity being taxed they pay more.

All that aside, if those millionaires want to save all day long they can do that but as soon as they actually try to, you know, gain any benefit from those savings they will be taxed at a much higher rate. Assuming they don't get some huge utility out of diving into a vault of gold coins like Scrooge McDuck there's no avoiding paying the piper.

Also a consumption tax doesn't replace every other tax that exists, it just replaces the income tax.

Explain how this works in the real world. If Daddy Bigbucks stops by my kiosk and buys a pair of sunglasses, how am I supposed to know how much consumption he's doing? How do I know I need to charge him a higher rate than the college kid with his part-time job who buys the same sunglasses?

You could do it through tax withholding the same way we do now, allowing people to get a rebate at the end of the year by demonstrating savings as compared to income. Easy peasy.

As I said, a prebate merely changes the tipping point. The tax still becomes regressive as income increases.

As I said this is factually false. It CAN be that way, but there is no requirement that it be so.

Just the opposite. It's nonsense to insist a sales/consumption tax can be as progressive as an income-based tax, at least in the real world. It doesn't work.

I have literally demonstrated to you exactly how it can be as progressive or even more progressive than an income based tax. I used numbers. I don't know what else to say other than you need to go back and read what I wrote.

 

[Zaap]

People do NOT increase their TAXABLE consumption automatically as their income increases.

If you're going to levy high enough taxes on consumption to replace income- the well-heeled will simply AVOID it by doing all their consuming via private means- IE: each other's businesses selling each other stuff, etc.

You'd have to eliminate "For all debts public AND PRIVATE.." in order to soak the rich via a sales tax, and good luck enforcing that.