Are sales taxes regressive? Is this bad?

[Skyn_Flynt]

I've been having this debate on another forum - other people like throwing stuff on there about how "Only the Koch Brothers and the 1%ers believe in flat income taxes, or having *no* state income tax... That sales taxes are regressive and hit the poor the hardest".

And I point out that I *was* earning very little about 10 years ago. Made $11,000 that year doing odd jobs. I probably didn't part with more than $5000 total in discretionary spending for food, gas, cheap clothes, Goodwill furniture and kitchen items. (I remember even saving about $100 a month while on this level of income, which I did not think was "enough" so I kept looking for better paying work until I found it.)

I think what some people cannot get their head around, is how radically you can cut your expenses when you have little money to manage.

If my discretionary spending was $5000 in that year, then a sales tax of 10% (if it was raised that high) would be $500. But the W-2 statements from that year in state tax withheld was $493. It's really about the same.

If I maintain the very same standard of living on a higher wage in later years, I clearly come out ahead of any level of income tax to "balance" out the "regressive" sales taxes.

[smalllife]

There is a difference between what is possible and what is probably.  It is possible to reduce discretionary spending even at really low income levels, thereby avoiding the regressive nature of the tax (because you spent a higher proportion of your income on necessities). It is probable that most of the working poor would spend most or all of their income on necessities or quasi-necessities (cell phone, car, etc. - things viewed as necessary that aren't really), thereby incurring a higher tax rate than someone with more income but the same amount of spending. 

I disagree with a flat sales tax for the above reason.  I am all for higher taxes on luxury items - high end automobiles, boats, homes over x square feet, or anything else indisputably for those with large amounts of disposable income. 

For what it's worth, my state is having a serious debate about eliminating the gas tax entirely in favor of a higher sales tax.  No one outside of government agrees with them and most think it's patently absurd - I mention this because I know it flavors my comments above.

[Skyn_Flynt]

I would agree that no tax on gas at all is innane. It's a use tax. Those who drive more, use more gas, wear out the roads faster.

If not a tax on gas, then a tax on vehicle weight or the number of axles could make sense. But then you're not collecting any maintenance revenue from out-of-state traffic.

[tooqk4u22]

I would agree that no tax on gas at all is innane. It's a use tax. Those who drive more, use more gas, wear out the roads faster.

If not a tax on gas, then a tax on vehicle weight or the number of axles could make sense. But then you're not collecting any maintenance revenue from out-of-state traffic.

Stick with the fist because as you say it is based on use whereas if was based on axles or weight those who drive a little are unfairly paying more than those who drive a lot. 

Back to OP - sales tax is inherently regressive which is why a lot of states, but not all, exclude food and clothing from sales taxes to minimize the regressive aspect to discretionary spending, so the real crossover for the discussion is what level of spending should be considered non-discretionary.

[Skyn_Flynt]

sales tax is inherently regressive which is why a lot of states, but not all, exclude food and clothing from sales taxes to minimize the regressive aspect to discretionary spending, so the real crossover for the discussion is what level of spending should be considered non-discretionary.

In my mind, food and clothing are so cheap it almost doesn't matter that they are taxed. We have AFDC, WIC, etc to help people with dependents. Even if paying for food, big bags of frozen vegetables and soup stock are cheap. $10 a day will easily feed an adult.

I might spend $300 a year on clothes, and I feel like it's less. Some $15 jeans, a few "outlet store" shirts and pants. Socks and underwear from the "Dollar Store". Coats from Goodwill. Mail order some nice shoes every 3 years, and augment with some cheap sandals at Wal*Mart once a year.

I think what's great about sales taxes (and property taxes) is that you can control and manage them. Heck, many necessities (kitchen items, yard tools, furniture, baby goods) can be had for free - if you just ask for second hand items from friends, neighbors, family, your church.

[Ishmael]

I very strongly support a healthy sales tax, with a premium on luxury items and a reduction on the essentials.

Why? Lots of reasons:

• It's naturally and clearly progressive.
• It would increase the value of things, encouraging people to buy less of them.
• It would increase the value of second hand items, encouraging quality things to be fixed rather than disposed of.
• Most of what is sold is junk now, so hopefully it would encourage people to seek out value rather than price.
• Centralized government services are more efficient than the "market", and need to be paid for somehow.
• They could be tweaked to encourage behaviours that benefits society as a whole without restricting people's freedoms to do otherwise, i.e. a great balance between the good of the many and the one.
• We could attempt to holistically price items on their overall cost to society. I.e., right now companies are encouraged to put whatever crap they can into products because we subsidize the external costs (via garbage collection, recycling and disposal).
• etc.

Along those lines, I'd love to see a junk food tax, and a carbon tax (implemented in such a way as to promote healthy food/sustainable energy respectively). I'd like to see the price of vehicles taxed to the yin-yang, and public transit (and biking, of course!) being encouraged instead.

For reasons the other way, I think taxes on services should be miniscule. Why discourage employment? Why don't we want the most skilled and knowledgable performing the tasks they are best at overall?

[Orvell]

Since it is so variable between states, here's a nifty list.
http://www.money-zine.com/Financial-Planning/Tax-Shelter/State-Sales-Tax-Rates/

[Jamesqf]

I would agree that no tax on gas at all is innane. It's a use tax. Those who drive more, use more gas, wear out the roads faster.

Not entirely true, because road wear from driving* is approximately proportional to the 4th power of axle weight.  So a Cadillac Escalade (at 5694 lbs) is going to cause about 65 times as much wear per mile as my sub-2000 lb Honda Insight, but it is only burning about 5 times as much gas.

*Of course there's also some wear from just being out in the weather, even if the road is never driven on at all.

But then you're not collecting any maintenance revenue from out-of-state traffic.

Same could be true of gas taxes, since with a decent-sized tank it's quite possible to drive across a high tax state and fill up in the lower tax one next door.

As to the regressiveness of sales taxes in general, I think most if not all states exclude food and other necessities. so there's one big non-regressiveness factor.  Then consider that a sensible poor person will not buy expensive luxuries, buy cheaper clothing ($40 jeans instead of $3000 suit/designer dress), buy a used car for $2000 instead of the $65K BMW, or deal in the second-hand Craigslist market, where there's no tax.

[Skyn_Flynt]

Since it is so variable between states, here's a nifty list.
http://www.money-zine.com/Financial-Planning/Tax-Shelter/State-Sales-Tax-Rates/

I'm glad we have choices. There are states without income taxes, some without sales taxes. New Hampshire does not have either, but does have a high property tax.

My concern has been that after moving to a state without an income tax, it might not last. But it appears that the remaining states which don't have them are based on state constitution clauses and court interpretations which make the enactment of an income tax very challenging. (Especially Washington, Tennessee, and Texas.)

New Hampshire tried to amend its constitution to prohibit income taxes this last election. It "failed" with 57% of the vote in favor, because it takes 2/3 to amend the state constitution. If the mindset of the electorate continues to shift from people moving there that are accustomed to an income tax, this could change.

[Richard3]

I very strongly support a healthy sales tax, with a premium on luxury items and a reduction on the essentials.

Especially in the world of tax, simple is good, complicated is bad.

Just look at the debates and legal cases that have happened in countries that have tried this.

http://www.which.co.uk/news/2010/06/what-you-do--and-dont--pay-vat-on-217890

[Honest Abe]

Right now we have a tax system that encourages consumption via tax write-offs and credits. We also have an economy that is heavily dependent on consumer spending as a percentage of our massive GDP. Not saying anyone is wrong, but do take a moment to consider the tectonic shift that would take place if we move from a tax code that penalizes rather than encourages consumption.

[Steel_Rain]

I very strongly support a healthy sales tax, with a premium on luxury items and a reduction on the essentials.

Why? Lots of reasons:

• It's naturally and clearly progressive.
• It would increase the value of things, encouraging people to buy less of them.
• It would increase the value of second hand items, encouraging quality things to be fixed rather than disposed of.
• Most of what is sold is junk now, so hopefully it would encourage people to seek out value rather than price.
• Centralized government services are more efficient than the "market", and need to be paid for somehow.
• They could be tweaked to encourage behaviours that benefits society as a whole without restricting people's freedoms to do otherwise, i.e. a great balance between the good of the many and the one.
• We could attempt to holistically price items on their overall cost to society. I.e., right now companies are encouraged to put whatever crap they can into products because we subsidize the external costs (via garbage collection, recycling and disposal).
• etc.

Along those lines, I'd love to see a junk food tax, and a carbon tax (implemented in such a way as to promote healthy food/sustainable energy respectively). I'd like to see the price of vehicles taxed to the yin-yang, and public transit (and biking, of course!) being encouraged instead.

For reasons the other way, I think taxes on services should be miniscule. Why discourage employment? Why don't we want the most skilled and knowledgable performing the tasks they are best at overall?

Govenment services are more efficient than the market?  Can you support this statement with any data?  I bet no :)  I have never, in my entire life, seen an effecient government service.  Some things have to be done by govenment so there is no comparison, but I would bet an awful lot of money that as soon as obama care is done with us, you will be wishing very much for the "ineffencient" old days :) 

Steel

[DebtDerp]

Growing up in Oregon I loved no sales taxes. My father who owned property, not so much. He preferred a sales tax over higher property taxes. In his view more people would be sharing the burden of paying for government services (and property taxes would be less). For those of us who consume less, sales tax is a good thing! We will spend less in taxes than those who consume more. The best combo? Renting in a no-income tax state while living a Mustachian lifestyle which naturally results in less sales tax being paid.