Is a perfect sales tax actually regressive?

Author: Savant
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#1
Savant
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Sales taxes are commonly seen as regressive, since the poor spend a larger portion of their income in the short term. However, a long-term sales tax doesn't tax value from consumers at the point of sale, it taxes value proportionately as soon as it is implemented. If I have an income or capital gains worth $1,000 and the price of everything goes up 25%, then the value of my income and capital gains is reduced by 20%. That's because the value of income is determined by purchasing power.

Let's say a rich person has $1,000 and a poor person as $100. Sales tax is 25% on top of a normal widget price of $1 a widget. Each of them buys 100 widgets. The poor person now has 80 widgets. The rich person now has 80 widgets plus $900, which can buy 720 widgets. Hence, the total value of the rich person's money is still reduced by 20% (from the value of 1000 widgets to the value of 800 widgets).

The main disadvantage of this tax is that if the government gets the money from the rich person earlier, they can invest it in roads and such. Although if the rich person invests their money in the stock market, the government would profit from that investment by getting more in taxes later when a larger amount of money is spent. Also, a proportional tax, even a perfect one, still isn't regressive.
#2
Dr.Franklin
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I'm assuming it's regressive in the sense that it's a flat tax? I mean sure mathematical proportions of purchasing power don't change, but that's still an abstract way of looking at it.

However at the end of the day, I would rather sales tax than income tax
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@Dr.Franklin
At the end of the day Doc, where did the other 40 widgets go?
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@Savant
At the end of the day Doc, where did the other 40 widgets go?
Same here, "Each of them buys 100 widgets. The poor person now has 80 widgets. The rich person now has 80 widgets", why don't they still have 100 widgets each?

Was there a twenty-widget tariff perhaps?
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@Savant
Sales tax dont need to apply to all products equally. For example, food can be without tax while expensive luxury stuff is taxed.
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@zedvictor4
At the end of the day Doc, where did the other 40 widgets go?
To the government who collects the tax?

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#7
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@zedvictor4
@Sidewalker
Same here, "Each of them buys 100 widgets. The poor person now has 80 widgets. The rich person now has 80 widgets", why don't they still have 100 widgets each?

Was there a twenty-widget tariff perhaps?

where did the other 40 widgets go?
Ok, I phrased that badly but now it's too late to edit. They each spent $100, which would have bought 100 widgets before.
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@Dr.Franklin
I mean sure mathematical proportions of purchasing power don't change, but that's still an abstract way of looking at it.
More abstract than looking at the quantity of money? Inflation is a very real issue that impacts purchasing power. That's what gives money actual value.

Would you give me 100 dollars for 100 pesos? Since purchasing power is just an abstract concept?
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@Savant
More abstract than looking at the quantity of money? Inflation is a very real issue that impacts purchasing power. That's what gives money actual value.

Would you give me 100 dollars for 100 pesos? Since purchasing power is just an abstract concept?
No it is not.
Purchasing power refers to the amount of goods and services that a specific amount of money can buy at a particular time. It's a measure of how much value a currency unit has in terms of what it can purchase. Essentially, it's a way to compare the relative value of money across different periods or locations, taking into account price differences.

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#10
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@Shila
Yes...that's the point I was making.
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Shila
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@Savant
Yes...that's the point I was making.
You said it was an abstract concept.

Would you give me 100 dollars for 100 pesos? Since purchasing power is just an abstract concept?

#12
ADreamOfLiberty
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@Savant
Universal sales tax has the same depressive effect as universal income tax on production.

A baker makes 10 pies and the government steals 2 and wastes them. Now you have 8 pies.

In the grand scope it doesn't matter whether this is done by taking the pies before or after the sale, and that is exactly the difference you're talking about. Income is just the profit from sales useless (and useful) middlemen not withstanding. Income tax is the tax on the sale of labor.



The difference is in the motivations created. Income tax discourages people from seeking high compensation monetarily. This artificially increases the value of non-taxable benefits such as health insurance, vacation times, supports and benefits, company culture (spending time with friends is a primary value for most humans), and most importantly: income stability.

Sales tax motivates the minimization of trading items and services. It artificially boosts the usefulness of full stack production, for example if you're building sailboats you can minimize the production stolen by hiring sail makers and making them in your shipyard instead of buying them (you would have to pay sales tax on that).

It advantages homecrafters/DIYers, cash black markets, and mega-corps that buy their whole supply chain. It strengthens actors looking to create monopolies or near-monopolies.

Sometimes governments try to avoid taxing production intermediate trade, and only charge consumers, but this is generally unsuccessful and devolves into VAT *explicitly penalizing every trade even within production chains*.
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@Shila
You said it was an abstract concept.
Dr.Franklin said it was an abstract concept. I was explaining why that line of thought doesn't make sense.
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@Savant
Ah, got it — if the person’s arguing that sales tax isn’t regressive because purchasing power is “abstract” or that inflation is what really matters, then yeah, that’s peak economic nonsense. Here’s how you can dunk on it:
  • Purchasing power is only “abstract” if you’re rich enough not to feel it.
    • A sales tax takes a larger percentage of income from low-income people because they spend more of what they earn. That’s regressive.
    • If someone making $20k pays 10% tax on basic needs and someone making $200k only pays that much on extras, who’s feeling it more?
  • Inflation affects everyone, but taxes affect people differently based on income.
    • Sales tax doesn’t scale — it hits the poor harder in real terms. That’s the definition of a regressive tax.
    • Inflation might eat into everyone’s wallet, but rich people have assets that grow with inflation (stocks, property). Poor people don’t.
  • Trying to deflect from tax regressivity by rambling about inflation is a bait-and-switch.
    • It’s like saying “Don’t worry about the pothole, the whole road might collapse someday.” One problem doesn’t erase another.
If you're arguing with someone over drinks, here's your pub-style mic drop:
“Bro, I’m not saying inflation doesn’t suck — I’m saying it doesn’t change the fact that a sales tax hits a broke dude buying groceries harder than it hits a rich guy buying a boat. You can’t abstract your way out of math.”
Want to follow this up with some specific policy alternatives (like VAT exemptions or progressive offsets)?


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@Dr.Franklin
if the person’s arguing that sales tax isn’t regressive because purchasing power is “abstract” 
I didn't say purchasing power was abstract. You did. Measured in reduced purchasing power, a sales tax is proportional.

“Bro, I’m not saying inflation doesn’t suck — I’m saying it doesn’t change the fact that a sales tax hits a broke dude buying groceries harder than it hits a rich guy buying a boat. You can’t abstract your way out of math.”
That applies to proportional income taxes too. Again, doesn't negate what I said about a perfect sales tax being proportional.

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@Savant
That applies to proportional income taxes too. Again, doesn't negate what I said about a perfect sales tax being proportional.
Proportional to what?
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@Shila
Proportional to what?
Income
#18
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@Savant
YOu dont know what regressive means 
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@Savant
I'm not sure I see the real difference between a sales tax and an income tax.

A sales tax is a tax that is levied when goods or services are exchanged for money, fundamentally, that's what is happening with an income tax also. When people receive money for their labor, isn't then, an income tax just another sales tax applied to the sale of my labor for money? 

Conceptually, they are the same, aren't they?
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@Dr.Franklin
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YOu dont know what regressive means 
It means taxing a lesser proportion of income from the rich. Which is true with sales tax in terms of dollars handed over to the government immediately, but not really true in terms of the actual burden of the tax (if it's implemented in a way that avoids loopholes).

Conceptually, they are the same, aren't they?
That's what I'm saying. Sales taxes are often criticized as a regressive tax, since poor people tend to spend more right away, so they pay more in taxes right away. Money exists to be spent, so in theory the rich would pay the tax eventually. It's possible the rich might buy from other countries with lower taxes or just have more time to find loopholes. Or they could wait for the tax to be lowered since they spend more on luxuries that they don't need to buy right away...that's why I specified a "perfect" sales tax. Because conceptually, it should function the same as an income tax.
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@Savant
Hmmmmmm.

A single rate of any social tax, is relative to income, so it doesn't matter who earns what and how much they earn.

I don't see why a sensible lower earner would necessarily spend more relative to their income.

In fact, I'm guessing that a higher earner will spend more on higher value goods.

Tax is only regressive because there are a higher proportion of low earners to higher earners.


Of course there are always a few dorks who will waste their money on widgets.

And also high earning misers, Mr Scrooge.
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@Savant
Proportional to what?
Income

The sales tax is an example of a proportional tax because all consumers, regardless of income, pay the same fixed rate. Although individuals are taxed at the same rate, flat taxes can be considered regressive because a larger portion of income is taken from those with lower incomes.
#23
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@Savant
Oh so now were switching up definitions thanks to loopholes
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#24
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@Dr.Franklin
Not really. Regressive and progressive are used to describe taxes in principle all the time. There's always some edge case that could change things.
#25
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@Savant
It is a bit like anti-abortion activists getting to define their side as "pro life" and the other side as "pro death".

"progressive" it's the wave of the future! Socialist science!
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@Savant
Not really. Regressive and progressive are used to describe taxes in principle all the time. There's always some edge case that could change things.

The difference between a progressive tax and a regressive tax is that lower income individuals pay a percentage of their income to a regressive tax and a percentage of their income to a progressive tax. Higher income individuals are the opposite.
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YOu dont know what regressive means 
It means taxing a lesser proportion of income from the rich.
It describes a tax where the poor pay a larger percentage of their income than the rich.

Which is true with sales tax in terms of dollars handed over to the government immediately, but not really true in terms of the actual burden of the tax (if it's implemented in a way that avoids loopholes).
Timing has nothing to do with it, a sales tax is regressive, the actual burden in terms of percentage of income, is greater on the poor, and lesser on the rich.

Conceptually, they are the same, aren't they?
That's what I'm saying. Sales taxes are often criticized as a regressive tax, since poor people tend to spend more right away, so they pay more in taxes right away.
Again, it isn't about timing, sales taxes are a regressive tax.

Money exists to be spent, so in theory the rich would pay the tax eventually.
Not so, a sales tax is a consumption tax, it's a regressive tax because the poor consume a greater percentage of total income than the rich.  Yes, money exists to be spent, but the way you get rich is you don't consume all the money you make, so how much you have grows till you are rich.  

It's possible the rich might buy from other countries with lower taxes or just have more time to find loopholes.
Loopholes are unavoidable, the rich are the ones who fund the campaigns that get the politicians elected, and the politicians make the loopholes to say thank you.
Or they could wait for the tax to be lowered since they spend more on luxuries that they don't need to buy right away
I really don't think anybody plays the tax market that way.
...that's why I specified a "perfect" sales tax. Because conceptually, it should function the same as an income tax.
What makes a sales tax "perfect"?  What is the difference between a sales tax and a perfect sales tax?
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@Sidewalker
the actual burden in terms of percentage of income, is greater on the poor, and lesser on the rich
In raw dollars, yes. That's not a great way to measure value, though. If the government reduces the value of some individual's income by 20% or takes 20% of their assets or takes 20% of their stock or 20% of their dollars, it makes little difference. Money is worthless without purchasing power.
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What makes a sales tax "perfect"?  What is the difference between a sales tax and a perfect sales tax?

Which best describes sales tax?
Sales tax applies when consumers purchase goods and services. It's a type of consumption tax, meaning it taxes people as they spend money, rather than on their income. A sales tax is also a type of indirect tax, which means it isn't paid directly to the government, the way income tax is.

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@Savant
the actual burden in terms of percentage of income, is greater on the poor, and lesser on the rich
In raw dollars, yes. That's not a great way to measure value, though.
In raw dollars and in any other way you measure value. 
If the government reduces the value of some individual's income by 20% or takes 20% of their assets or takes 20% of their stock or 20% of their dollars, it makes little difference.
I concur, 20% is 20%.
Money is worthless without purchasing power.
No, there is investment power money too, and that money is worth much more than that punk purchasing power money.