Sale Tax is regressive

[Cozarkian]

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?

They dont have to actually purchase the same set of goods. However, you have to assume they do to calculate whether the tax is regressive. Otherwiseyou, are comparing apples and oranges by changing the constant when attempting to calculate the variable.

 

[Jaepheth]

I was tossing an idea around the other day:

No income or sales tax.

100% Estate Tax

Lets you use your money while alive, goes to the state when you die.

There would have to be a lot of holes plugged up about trusts/gifting/etc. and you'd have to tax companies/immortal entities differently. It's probably not feasible since you'd have to basically outlaw inheritance.

 

[Bart*Simpson]

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.

Luxury taxes fail because the wealthy will just buy their luxury items in foreign markets. Then the working class people who made a living at providing those luxuries are put out of work but deep thinkers like yourself feel better because you "did something" about a non-problem.

Example: http://townhall.com/columnists/walterewilliams/2011/08/10/ignorance,_stupidity_or_connivance

 

[fskimospy]

They dont have to actually purchase the same set of goods. However, you have to assume they do to calculate whether the tax is regressive. Otherwiseyou, are comparing apples and oranges by changing the constant when attempting to calculate the variable.

The amount consumed is not the constant, the tax rate is.

 

[Bart*Simpson]

The amount consumed is not the constant, the tax rate is.

Wrong. The tax rate is not a constant when it becomes cost-effective for people to evade paying it altogether.

 

[Cozarkian]

The amount consumed is not the constant, the tax rate is.

To determine whether a tax rate is progressive, you must analyze the effect of a change in income on the tax as a percentage of invcome, all else equal. You did not hold all else equal.

Here is the math you did where x = spending, y = income and z = tax rate as a percent of income.

50% * x / y = z, Where x and y = 25000.
50% * x / y = z, where x and y = 50000.

That doesn't properly isolate the effect of y on z. In order to do that, you must hold x constant.

Here: http://www.econmentor.com/personal-finance-economics/ssepf3/define-progressive-regressive-and-proportional-taxes/text/1713.html#Define progressive, regressive and proportional taxes

 

[fskimospy]

To determine whether a tax rate is progressive, you must analyze the effect of a change in income on the tax as a percentage of invcome, all else equal. You did not hold all else equal.

No, definitely not. Income and consumption are highly correlated so any model about the progressivity of a tax system that assumed they were independent would be operating on faulty assumptions. To hold those all equal in an arithmetic sense assumes independence and would give you badly wrong answers.

Here is the math you did where x = spending, y = income and z = tax rate as a percent of income.

50% * x / y = z, Where x and y = 25000.
50% * x / y = z, where x and y = 50000.

That doesn't properly isolate the effect of y on z. In order to do that, you must hold x constant.

This is not how any competent individual would calculate the progressivity of a tax system because as I said before it assumes independence between variables that clearly does not exist. You don't even need to use any math to see why what you're saying is ridiculous. How many people do you know that make $200k and only spend $20k? Even one? If not, does that sound like a model of taxation that's going to give you accurate results as to what percentage of someone's income they are likely to pay in taxes?

 

[Cozarkian]

This is not how any competent individual would calculate the progressivity of a tax system because as I said before it assumes independence between variables that clearly does not exist. You don't even need to use any math to see why what you're saying is ridiculous. How many people do you know that make $200k and only spend $20k? Even one? If not, does that sound like a model of taxation that's going to give you accurate results as to what percentage of someone's income they are likely to pay in taxes?

Congratulations, you just called virtually every economist in the world incompetent. You are free to argue that isn't how should be calculated, lots of people do, but that is how it is properly calculated based upon the accepted definition.

Do you agree sales tax without a prebate is regressive? Go back to your thought experiment and do the same math without the prebate. You'll find the result is a proportional rate not a regressive rate, which should be an enormous clue that you are doing math differently than economists.

 

[DrPizza]

No, definitely not. Income and consumption are highly correlated so any model about the progressivity of a tax system that assumed they were independent would be operating on faulty assumptions. To hold those all equal in an arithmetic sense assumes independence and would give you badly wrong answers.



This is not how any competent individual would calculate the progressivity of a tax system because as I said before it assumes independence between variables that clearly does not exist. You don't even need to use any math to see why what you're saying is ridiculous. How many people do you know that make $200k and only spend $20k? Even one? If not, does that sound like a model of taxation that's going to give you accurate results as to what percentage of someone's income they are likely to pay in taxes?

Yes, they spend their money, but not in the same way. E.g., you don't normally pay sales tax on the purchase of a home at the same rate you do on other goods.

People making $20k aren't normally socking away money in a 401k. Those making $200k are paying a higher percentage of their income into 401k's, thereby reducing the percentage of their income spent on goods for which sales tax is paid.

Hey! There's an idea! Sales tax on buying stocks, bonds, and all those other things that benefit those with more wealth.

 

[Bowfinger]

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.

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.

Your creative definition aside, you seem to have morphed your proposal into something that offers no real benefits over the current system. In fact, by exempting savings and investment, you're concentrating even more of the tax "burden" on middle and upper-middle class. I'm also not sure how you've missed the reality that wealthy people put a disproportionate share of their wealth into investments rather than goods and services.

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

Mathematics requires it.

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.

Umm, I used numbers too, and I literally demonstrated to you exactly how it is not progressive at a higher income.

 

[fskimospy]

Congratulations, you just called virtually every economist in the world incompetent. You are free to argue that isn't how should be calculated, lots of people do, but that is how it is properly calculated based upon the accepted definition.

If you think that is how economists calculate the progressivity of tax systems then show me even a single empirical analysis of the effects of any consumption based tax on people of differing incomes that uses your model.

Do you agree sales tax without a prebate is regressive? Go back to your thought experiment and do the same math without the prebate. You'll find the result is a proportional rate not a regressive rate, which should be an enormous clue that you are doing math differently than economists.

Again I have not seen a single solitary economics publication that uses your model. I'm not sure that you have a strong grasp of how economists determine the progressivity of tax systems.

 

[fskimospy]

Your creative definition aside, you seem to have morphed your proposal into something that offers no real benefits over the current system. In fact, by exempting savings and investment, you're concentrating even more of the tax "burden" on middle and upper-middle class. I'm also not sure how you've missed the reality that wealthy people put a disproportionate share of their wealth into investments rather than goods and services.

It offers large benefits over the current system as it sharply limits the distorting effects of our current tax system and stops disincentivizing work and investment. As I already covered, there's no requirement for making things less progressive than they are now. We could make the system even more progressive if we wanted to.

Mathematics requires it.

Umm, I used numbers too, and I literally demonstrated to you exactly how it is not progressive at a higher income.

You showed a case in which it CAN be regressive, you did not show how it MUST be regressive. Again, I already showed you how it can be progressive. It's just math.

 

[buckshot24]

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.

Life is regressive.

 

[fskimospy]

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.

Oh this is also wrong.

Keeping track of consumption can be almost no more difficult than keeping track of income taxes today. People report their income and their savings for the year. Any income not saved is considered consumed. Pretty simple.

 

[Meghan54]

Life is regressive.

Yeah, figures it would be for you. For most others, life is progressive.

 

[Mandres]

imo the biggest argument against moving to a consumption-based tax system is all the uncertainty it brings around how much revenue will actually be collected.

It incentivizes black markets, drastic reductions in consumption, and other unpredictable changes in consumer behavior. How can you forecast a rate scheme that matches current income tax revenue when you really have no idea how people will change their behavior in response to the new scheme? The Federal govt. can't risk getting it wrong and ending up with a huge reduction in revenue, and then trying to change it later with no guarantee that the changes won't further impact consumer behavior.

 

[buckshot24]

Yeah, figures it would be for you. For most others, life is progressive.

Being less well off is harder than being more well off. That is how life is regressive.

 

[Fanatical Meat]

imo the biggest argument against moving to a consumption-based tax system is all the uncertainty it brings around how much revenue will actually be collected.

It incentivizes black markets, drastic reductions in consumption, and other unpredictable changes in consumer behavior. How can you forecast a rate scheme that matches current income tax revenue when you really have no idea how people will change their behavior in response to the new scheme? The Federal govt. can't risk getting it wrong and ending up with a huge reduction in revenue, and then trying to change it later with no guarantee that the changes won't further impact consumer behavior.

This, sales tax works pretty well not perfectly but pretty well why mess with it and risk unintended consequences?

 

[swamplizard]

Luxury taxes fail because the wealthy will just buy their luxury items in foreign markets. Then the working class people who made a living at providing those luxuries are put out of work but deep thinkers like yourself feel better because you "did something" about a non-problem.

Example: http://townhall.com/columnists/walterewilliams/2011/08/10/ignorance,_stupidity_or_connivance

Hi Bart,

Tariffs.

 

[swamplizard]

Greetings taxation with (or without) representation,

Sales Tax is levied by the state and that is where my argument comes in, at the state authority.

A decrease in sales tax will generate more sales with the dollar turnover in excess of the sales tax lost. An adjustment to higher income taxpayers will meet or exceed the lost revenues going into the coffers and allow the lower income folk more actual money to expend.

 

[echo4747]

I wonder if the US eliminated the income tax if you would then see a big dropoff in the demand for US savings bonds, Muni Bond funds etc.

 

[Bowfinger]

It offers large benefits over the current system as it sharply limits the distorting effects of our current tax system and stops disincentivizing work and investment.

Please support your claims here with specifics. What distorting effects does it limit, and how are they worse than the new distorting effects of heavily taxing consumption? How are work and investment discouraged in the current system? In your system, spending is discouraged. Most economists seem to agree that spending is a primary driver of our economy, if not the primary driver. What's the economic impact of discouraging spending?

As I already covered, there's no requirement for making things less progressive than they are now. We could make the system even more progressive if we wanted to.

I agree, one could theoretically devise a consumption tax that was progressive. It would require require an IRS-like organization to administrate it, and it would require punitively high tax rates on the proportionately lower spending of the wealthy, rates of several hundred percent. (Before you try to refute this, explain how my sample millionaire who spends only $125K will be taxed at your same effective rate as the guy who earns -- and spends -- $50K.)

You showed a case in which it CAN be regressive, you did not show how it MUST be regressive. Again, I already showed you how it can be progressive. It's just math.

No, you showed how it can be progressive based on the assumption that everyone spends every dollar they earn. That assumption is wrong. Show us how it can continue to be progressive even in the real world where poor people spend everything they make; rich people do not.

As incomes increases, one spends proportionately less on taxable goods and services. That's reality. So show us a concrete plan to overcome that reality. So far, you've taken the very political approach of declaring you have the solution without offering a substantive plan. Give us details.

 

[Cozarkian]

Sticking with the 50% rate:

Person 1 makes 100 spends 50, rate = 25%.
Person 2 makes 500 spends 400, rate = 40%.
Person 3 makes 500 spends 100, rate = 10%.

Sales tax is now both simultaneously regressive and progressive? No, those words are antonyms, so it cannot be both A and not A.

 

[Cozarkian]

Oh this is also wrong.

Keeping track of consumption can be almost no more difficult than keeping track of income taxes today. People report their income and their savings for the year. Any income not saved is considered consumed. Pretty simple.

Who reports their savings? I report interest, but not savings. Even if you made banks report the balance of accounts, what if people claim they saved money in a shoe box or a penny jar? What about the money in my wallet that hasn't been spent? How about gifts? Will you be adding consumption tax to loan repayments, lottery tickets, and services? Do I have to pay tax on the fair market value of my wife's ability to cook? What about on the fair market value of my own?

 

[Brian Stirling]

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.

Sales tax starts a dollar one -- there is no deduction the average Joe gets for it so everything they buy that's taxed and that's just about everything is taxed at the full amount according to the region.

The wealthy (Mitt Romney aka 47% boy) like to talk about the poor and working class paying no taxes but they conveniently leave out the fact that when the poor buy things they pay sales tax and the rate they pay is exactly the same rate Romney pays. Or is it ... a guy like Romney can deduct things the average Joe can't so his tax rate for things he buys will tend to be less than the average resident of Flint MI.


Brian