Taxpayer asks:
In your articles about the states, you keep saying that sales tax is regressive. But since everybody is paying the same percent, doesn’t that make it a flat tax which means it’s not regressive? I’m confused.
Taxgirl says:
Good question!
Most sales taxes are flat rate taxes in that the same percentage is levied on the same kinds of items. So, if you and I both buy a package of gum in Philadelphia that costs $1.00, we both pay 7% on that package of gum (at least this week).
Where the tax is considered regressive is as a percentage of income. Let’s assume that you make $100,000 and I make $20,000. If we both buy $5,000 worth of taxable items for the year, we both pay $350 in sales tax (assuming we’re still in Philly). Now, your effective tax rate is .35% and mine is 1.75%. In other words, I’m paying an effective rate of 5 times more than you are as a percentage of my income.
In some states, “essential” goods like grocery items, clothing and medicines are exempt from sales tax. But in many states, sales tax is imposed on essentials – in North Carolina, for example, clothing is taxed. While it probably follows that you’ll buy more expensive clothes because you have more money, it will likely still cost more as a percentage of income to pay the sales tax on my clothes because I make less money overall. Does that make sense?
That calculation changes a bit when you consider excise taxes. Those are taxes which are generally imposed on alcohol, cigarettes and other “luxury goods”, sometimes associated with “sin taxes.” Excise taxes are considered even more regressive than sales taxes because of the higher rates associated with those taxes. In most cases, those are taxed by volume or type and not by cost, which makes the excise tax difference between a very nice bottle of Mondavi and a bottle of Boone’s Farm non-existent.
A number of alternatives to the sales tax have been proposed, including the infamous Fair Tax, to address concerns about the regressive natures of sales taxes. To date, none of the alternatives have been implemented.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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Without revenues, a government can have no power.
Alexander Hamilton, First Secretary of the US Treasury
You will find no federal holiday dedicated to our love of taxes. There will be no parades in honor of taxes. No ceremonies, concerts or TV specials. This is because many in the US think of taxes as a burden, this heavy weight on our collective shoulders that “isn’t fair.” Some folks even dare to say that they have never benefitted from our system of taxation. Those folks are wrong. In fact, it is completely fair to say that our country is the country that it is today because of taxation. Our history as a country is deeply affected by our system of taxation: the wars that we fought and won have all been financed by a system of taxation. All that has changed, really, from war to war is the kinds and levels of taxation.
In the late 18th century, in order to pay off debts from the Revolutionary War, Congress imposed a number of taxes on such luxury items as alcohol, tobacco, sugar and some real property. A few short years later, Congress imposed additional excise taxes to pay for the War of 1812. Those excise taxes were later repealed.
In the relative peace that followed, the US government didn’t collect revenue directly from its citizens. Instead, the government depended heavily upon the sale of public land and customs duties. That all changed in 1861, when the financial pressures of the Civil War forced Congress restored excise taxes and instituted the tax many Americans grew to hate: the personal income tax. The income tax was levied at 3% on all incomes higher than $800 a year.
Nearly half a century later, the financial burdens associated with World War I made income taxes a centerpiece of our modern economy. By the mid-20th century, income taxes were firmly linked to maintaining our position as one of the most influential countries in the world, linked closely to the continuous presence of a powerful military.
This is not to say that all of our military decisions have been good ones or that our tax system is perfect. But before you decry taxes as completely wasteful and useless, take a moment to think about what it has bought us: freedom and democracy.
I say this on a day when we honor those who have fallen protecting our country, those that have offered up sacrifices far greater than a few dollars out of your pocket. The men and women who have served our country have spent endless days away from their families and have been thrust into dangerous and unfamiliar situations. Some of them never made it home. And many of those that did, came back with injuries and memories that are far more painful than we can imagine.
And maybe you don’t like paying taxes. But there are those who have gone to their deaths to defend your right to say that out loud, for me to scribble away on my blog, for you to attend tax protests and cast a vote about how you feel.
Think about that. And on this day of remembrance, take a moment to thank our soldiers for their contributions to our country. They’ve given us so much.
Finally, indulge me for a moment. I wanted to a give a mention to my brother, Rob; my brother, Timothy; my father-in-law; my grandfather; my great-grandfather; my uncles; my cousins; and all of those that I know who have ever donned a uniform for our country. On this day – and every day – I thank you.
Image courtesy of the US Army through Wikimedia
