Public Budgeting the Idea of Term Paper

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A sales tax is particularly regressive because low income people spend a greater percentage of their income. They might spend 100% of their income, which means they would pay a sales tax on all of that money. A wealthy person will spend more in terms of dollars on a sales tax, but will also not spend 100% of his or her income. Some of that income will be saved, meaning that not all of the wealthy person's income will be subject to this tax.

For poor people a higher portion of income will be taxed, and there is also less margin for tax increase in their budgets. A wealthy person can afford to pay a little more tax and still have a roof over his or her head, and food on the table. At lower income levels, even a moderate sales tax like 5% is going to put those things at risk. Thus, a sales tax is a particularly regressive plan.

The income tax system is also regressive to some extent, however. Employment income is taxed at a higher rate than investment income. For lower income people, all of their income is in the form of employment income, whereas for higher-income people a large portion of income come from investments, which are often taxed at a lower rate, if it comes in the form of capital gains.

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However, it is telling to see where the support for a sales tax as a replacement to the income tax comes from -- mainly from the far right of the political spectrum. Support for tax proposals often reflect who benefits from those proposals, so when the wealthy conservatives want a tax, they must see some value in it. A small sales tax affects a much lower part of their incomes than the income tax they pay -- even at capital gains rates. To replace the income tax with the sales tax dollar for dollar would put more of the tax burden on lower income people.

Thus overall, while there is some merit to the idea of introducing a sales tax as a means to deal with the deficit, it should be noted that sales taxes are inherently regressive, and that they are not a good idea as far as replacing the income tax. It is also irresponsible to eliminate a major source of revenue in times of huge deficits.

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