Are sales taxes regressive?

Question

There are competing definitions of regressive taxes out there:

On Wikipedia:

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.

In a textbook I use (Case, Fair, and Oster's Principles of Economics):

A regressive tax is a tax whose burden, expressed as a percentage of income, decreases as income increases.

By the Wikipedia definition, a sales tax would technically be a proportional tax as the rate is fixed regardless of how the base (consumption) changes.

However, by the textbook definition, and assuming that households with lower income consume a greater percentage of that income than households with higher income (i.e. have lower savings rates), a sales tax with a fixed rate would be regressive.

You might be inclined to suggest that the textbook was defining it specifically for income taxes where the Wikipedia article is defining it generally. Actually, though, the authors of the text make it clear they mean their definition to be general. They say that they define it in terms of income because "all taxes are ultimately paid out of income." I think that statement is a bit imprecise, but whatever. They go on to show an example that demonstrates that sales taxes are regressive (conditional on lower-income households saving less).

I agree with them on an intuitive level that sales taxes are regressive. But then why has Wikipedia decided on a definition that is independent of income, with one consequence being that sales taxes are proportional?

Answer 1

It depends on the definition you want to use. You can define a regressive tax as the wiki says, in which case a sale tax would not match.

But the goal of definition of different class of taxation is to assess the impact on person being taxed. Without considering income the above definition becomes moot. Sure the tax is proportional (fixed share of tax on any price) but it's effect on those who pay it is different.

The first definition is derived , I believe, in the context of income taxes in which the income is being taxed and the definition matches it's intuitive notion. Some taxation system are subject to the requirement that the system as a whole should be progressive, I.e the total tax burden should increase with income. In this context is natural to think that sale taxes are regressive, while they don't match the formal definition.

Answer 2

This seems to be more a question of definition than anything else. Wikipedia says that a regressive tax rate decreases " as the amount subject to taxation increase". One of the most regressive taxes in history is the poll tax, which caused countless tax riots down through the ages. What is the "amount subject to taxation" for a poll tax? Well, the income of the person in question. Since a poll tax is a fixed tax per person, the lower the income of the person, the higher percentage of their income they need to spend on the tax.

Sales tax is the same way. If you define the "amount subject to taxation" as the wealth or income of the buyer, you see that its indeed a regressive tax. If instead you take the "amount subject to taxation" as the price of the sale, then you might conclude the tax isn't regressive. However, in usual usage the amount in question is the total income of the person being taxed, not particularities on the items being taxed.

Sales taxes are regressive, cause large deadweight losses, and provide an inventive for companies to vertically merge (to avoid repeated sales tax).

Read more about this here.