Beth S. writes:
Two words: flat tax.
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flat-tax
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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This hasn’t been a great year for taxpayers. As the economy takes a dive, folks are growing more and more unhappy with the amount of taxes paid. And this year, in particular, watching the IRS botch rebate payments has made taxpayers even more angry.
Wouldn’t it, I’m often asked, just be better to have a Flat Tax?
No, no and no.
There’s a great piece over at Professor Maule’s tax blog that examines why a Flat Tax is more of a political carrot than a realistic possibility. Check it out.
For more commentary on the fair tax versus the flat tax, you can follow a series of conversations beginning at this post.
Technorati Tags:
fair tax, flat tax
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Many proponents of the flat tax have advocated for the elimination of tax on dividends and interest, leaving only a tax on wages and “earned income”. The argument for the elimination of such a tax is that it would encourage investments and savings and thus, stimulate the economy. The argument against the proposition is that it unfairly places a tax burden on those who must work for a living and not rely on “passive income” (dividends and interest). What do you think:
Should Congress eliminate the tax on dividends and interest and implement a flat tax on wages and “earned income”?
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