Herman Cain's 999 tax proposal has brought this topic to the forefront. So, my answers: In a technical sense, yes. In a reasonable sense (looking at lifetime income), no.

Here's a simplified example.

There is a country where all people live for two periods. The prevailing interest rate between periods is 0%. There is a sales tax of 20%. Demand for goods is perfectly inelastic. Every person earns $40,000 in period 1 and $8,000 in period 2, and spends $24,000 in each period.

Yet a look at the statistics of this country would have "the rich" (people currently in period 1) paying $4,000 in taxes, or 10% of their income. "The poor" (people currently in period 2) pay $4,000 in taxes, or 50% of their income. A naive observer would call the sales tax "highly regressive". Yet this is clearly nonsensical - everyone in the fictious country is identical, so it can hardly be claimed that one group is being favoured over the other.

The point of this example is not to argue that all low earners used to be high earners, but that it's specious to claim that someone who consumes less than they earn today will consume less than they earn tomorrow. Even if the group of people making $X-$Y per year always do so, the identity of that group shifts over time.

This is not a claim about income mobility so much it is a claim about the purpose of saving. If you're saving or investing, you're doing so because you either plan to consume it all later in your lifetime (in which case you will at some point pay sales taxes that are a very high proportion of your income) or give it away to people who eventually consume it all (paying sales taxes in the process). Even if you were somehow able to keep money in a trust in perpetuity and have your descendents live off the proceeds, sales taxes would still need to be paid on that consumption.

Only in the sense of a literal Scrooge who earns money and never spends it nor any interest earned on it do will taxes fail to be paid. But what exactly is Scrooge earning money for, if it not to potentially consume it at some point? If people believe that Scrooge has a virtually 0% chance of ever spending his money, then he has basically the same effect as if he had burnt all his money. Doing so increases the value of currency by the same amount that he burns, so he is doing the world a service.

But regardless of our quibbles over what the exact effect of Scrooge is, real-life Scrooges who literally plan to never use their money for anything are very rare, if not non-existent. For any sensible person, a sales tax is not regressive.

This is absurd. How can someone in your 2nd example say a 50% is regressive if everyone makes the same income?

The very nature of regressive taxes is that there must be a lower income level where the tax paid is a higher percentage of their income than the higher income group, so I fail to see the point of your examples.

Finally, if you are making an argument that eventually all monies wind up paying sales tax because it'll all be spent eventually, I somewhat agree if we take out that things like education costs which actually may be tax deductible.

Your idea is skewed. Eventually money WILL be spent, the problem is gaining enough extra money to have an impact on your life through not having to work for it.

If you give me 7 million dollars right now in one lump sum, I'll never work again for the rest of my life. If you give me 7 million dollars of income over the course of my lifetime (30 years) I'll still have to work through most of those 30 years (i could possibly swing it to retire earlier than 30, but I'm unsure how many years I could shave off, but its definately not less than 20).

What I'm saying is it doesn't matter if the money will eventually be spent.

Don't have to read OP to know that he's either concocted some horrible hypothetical that doesn't fit reality or he doesn't get why consumption taxes are considered regressive.

Oops, I didn't make it clear that "Period 1" and "Period 2" are not universal time frames, but represent the age of the person. So, some of the population are living in "Period 1" i.e. their youth and working ages, and some are living in "Period 2", i.e. old age. Here's my edited example:

There is a country where all people live for two periods. Some people are currently living in their first period, some are currently living in their second. The prevailing interest rate between periods is 0%. There is a sales tax of 20%. Demand for goods is perfectly inelastic. Every person earns $40,000 in their first period and $8,000 in their second period, and spends $24,000 in each period.

That's an issue with the specific cases of tax deductible consumption, not sales taxes in general.

How does this matter? $7 million today and $7 million over 30 years are different amounts, with the latter having a smaller net present value.

I've invented a shockingly convoluted hypothetical that makes the dubious assumption that people don't earn money just to throw it a bonfire.

So we are making the assumption that each person's needs are the same, or there are no geographical differences in cost of living, etc? I mean.. I can kinda see your point if you want to take out everything that makes a difference through a hypothetical which is not possible. But why are you even making this situation up when it's clearly not possible?

And the 7 million example was to make the point that if I had a lump sum right now I could live the rest of my life on a nice income and never have to work in order to do it. Oh, and I'd pay less in taxes than regular income.

Obviously, there are many simplifications from the real world, but that's the case in any hypothetical. If that were a sufficient criticism, then there would be no use for hypotheticals.

The reason why sales taxes are considered regressive is because savers pay a lower proportion of their income in tax than non-savers, and rich people are more likely to save. The purpose of my hypothetical is to show that this only applies in the saving period. In the dissaving period, said people pay a higher proportion of their income to sales taxes. Since dissavers are inevitably savers at some point in some way, the apparent regressivity of sales taxes is just an intertemporal illusion.


Cool? 7 million is a nice sum to live off whatever system you live in. You'd still have to pay taxes on all your consumption. Yes, you'd pay even more under an income tax system, but that's because taxing savings makes the system more progressive.

At what point are the working poor turned into savers? When do people who make just enough income to cover their basic necessities move into a period where they have enough to save?

I am not saying that all low income people were savers. I am saving that (with a sales tax) a saver pays a lower proportion of their income in taxes when they are saving, and a higher proportion when they are dissaving, such that the tax is proportional overall.

Ok so you are saying people go through different cycles and that the savers will pay more when they aren't saving through consumption. Ok, fine.

Answer me a question. If a person makes 20k a year (adjusted each year for inflation) for the rest of their life, and another person makes 200k a year for every year of their life, who paid more in proportion to their lifetime income in sales tax?

All else equal, they should pay the same proportion. If the 200k person leaves a bequest, they may pay less, but whoever spends the bequest will end up paying sales tax on it.

In this thread people learn what proportional tax systems are and others fail to learn they are still considered regressive even though the difference person to person is effectively deferred, mostly because that deferred sum can be reinvested to show profit.

When two people spend 20k/yr but one makes 180k more per year than the other then by definition the one who makes more is better off. The rich being better off than the poor in evaluating tax contributions = regression.

1$ today is worth more than 1$ tomorrow, thanks to investing opportunity costs and inflation.

By the time money has been passed on to a generation or two tax-free, the wealthy will have made a metric assload off of investments. Which will incur a capital gains tax off 0% under 9-9-9.

I guess I'm not making sense to you.

Well, obviously the person making 180k more per year will be better off when he spends that money in the future. But luckily, a sales tax will tax him then.

Well, yes, you've described the time value of money. Why is it is inequitable or (especially) regressive that people should be able to defer consumption in exchange for greater consumption in the future is questionable.