I couldn't reply to null0pointer directly. Sales tax is considered regressive because it is a flat percentage X% of spend. Poor people spend close to 100% of their income, so it is basically an X% tax. Rich people might spend closer to 10% of their income so it is an X/10% tax on rich people.
That's why basic, necessary goods are not taxed, only luxury items. We have a GST in Australia and poor people effectively do not pay any tax on purchases.
Most sales tax proposals I've seen will exempt food and other "necessities" for exactly this reason. With how complex income taxes are, I'd love to get a serious discussion going about a sales ax replacing it.
It's not as regressive if you charge sales tax on housing.
In point of fact, the US mortgage interest deduction is highly regressive. It favors those who can afford a down payment on a house over those who can't, who by definition will be poorer.
If the sales tax applied to buying a house, it would be quite progressive. It could even only apply to the cost of the house less some amount (say, $100k) which would make it even more progressive.
Property tax already does this, right? China has a sales tax on housing but no property tax, which seems to exacerbate wealth inequality there as people can speculate on property without penalty for not putting it to use.
Compare the person earning $10,000 and the person earning $1,000,000. If they both consume $10,000 worth of goods and there's a 20% sales tax included in that, the poor person's effective tax rate is 20%, while the rich person's effective tax is 0.2%. Even if the rich person consumes 10x more, they're only paying 2% of their income.
Then again, if you stuff 98%+ of your income into a mattress are you really advantaged
over the person making $10,000 to justify paying more tax?
One you exchange the money - where an advantage can be gained - then it can be considered a sale and thus taxed. A sale does not necessarily need to be towards consumption.
I see what you're saying -- money isn't useful until it's spent. But I think the argument is that a wealthy person doesn't put that extra 98% of their money under a mattress, they invest it. Now they have passive income on top of their previous income, and their effective tax rate from sales tax is even lower. Until eventually they have so much well that they don't have to work at all, and neither do their descendants, and you have an aristocracy.
But, if such a system was in place, the money would be taxed during the purchase of the investment vehicle. A sale is a sale. Unless the money is literally stuck in a mattress, it is going to be taxed upon doing anything useful with it. If it is simply stuck in a mattress for all of eternity, one is really no further ahead. Money only has value when you can use it to facilitate a sale; and when there is a sale there would be a tax.
Poor people spend a larger fraction of their income on things that get taxed. Ergo a constant tax rate on consumption is regressive. This could be paired with UBI though.
