Friday, October 21, 2011

Herman Cain's 999 Plan, Part 3: Aren't sales taxes regressive?

But aren't all sales taxes regressive? 

 Funny, I never hear anyone bring this one up when the state or local governments are trying to get us to approve the SPLOST, or penny sales taxes, or any of those other "temporary but somehow never dying" sales taxes to pay for all of those local projects they love. When politicians want to put a new sales tax on us, the word "regressive" is never heard. It's only when someone proposes getting rid of a complicated income tax system that no one likes anyway that this word even comes up.

Anyway, I want to be careful with this topic. "Regressive" is a politically-charged word. Let's make sure we establish what it means, first. According to Investopedia, a regressive tax is "a tax that takes a larger percentage from low-income people than high-income people". It may be just me, but that doesn't sound like a very precise definition. A larger percentage of what?

Does this mean that, in a regressive tax, a poor person pays more than a rich person for the same stuff? That would definitely be bad. But then, the page goes on to say this:
A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder....
Some examples include gas tax and cigarette tax. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income. 
Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food, clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more affected by it because they are less able to afford it.
So,  following this logic, regressive means... everyone gets equal treatment. It's unfair, because it treats everyone the same. If that's what "regressive" means, I don't think I particularly care whether a tax is "regressive". I would rather have fair and equal.

Diving a bit deeper into that analysis, there are a number of assumptions. ""Expenses for food, clothing, and shelter tend to make up a higher percentage of a lower income consumer's overall budget." Well, that's basically a true statement. But usually sales taxes don't apply only to essential expenses. It will apply to all new goods, essential or otherwise. As people get richer, they do tend to spend more money on all those nice little non-essential goods. Also, as my wealth increases, my spending on essential goods may very well increase, as I decide that I can afford nicer food, maybe a restaurant every now and again, better clothes, and maybe even a cleaning service to keep my shelter nice. (I'd love to be able to upgrade my shelter, but we're in a housing slump, and I can't sell the one I've got.) This means that as I have more money, and my spending goes up... drum-roll please... I pay more taxes.

Also, to some degree, the 9-9-9 tax gives everyone some control over how much they pay in taxes. Sure, you can't choose not to buy food, clothing, and shelter... but you can choose to get your clothing and shelter used instead of new, which means tax-free. Families at the poverty line are much more likely to shop consignment than families with private jets. Here's what I'm saying: You can't control your income. You can control your expenses, to a degree. This means that at all levels of income, you have more power over how much you pay under a consumption tax, than under an income tax. Is that "regressive"?

This "regressive" and "progressive" categorization of taxes seems to me to be straight from Marx and other various class warfare ideologies, and it's very disappointing to me that so many of the Republican candidates for President would hang their hats on it.

Continued in Part 4....

No comments: