Is a Consumption or Sales Tax Regressive?

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In his famous “A Time for Choosing” speech, Ronald Reagan used the phrase, “From the needy to the greedy” to describe an urban renewal program gone bad.  An example would be the razing of a newly-completed $1.5M building to make way for government housing.  Dr. Arthur Laffer would describe the current tax system much the same way.  Dr. Laffer described even a straight consumption tax with no overt provisions for the poor such as “Prebates” and grocery exemptions as still being progressive because of the dynamic effects of such a tax and the fact that the poor do nat pay for many necessities — the government pays for them via welfare of various stripes. Furthermore, he will counter that the current tax system actually is regressive itself. How can that be? Via hidden taxes. When the government taxes businesses, there are only three stakeholders that end up paying those taxes:

1. The owners or stockholders
2. The employees
3. The customers

For a business to be sustainable, even if employees’ pay and shareholders’ returns need to be reduced to remain competitive, every penny of those taxes is passed down to the customer, eventually being hidden in the price of the end product at the retail cash register. Even the poor end up paying for these taxes in some respect. It may be the “working poor” who are impacted most of all.  They earn too much to receive most forms of welfare but have to pay those hidden taxes. Even the poor on welfare end up being able to buy less with their SNAP cards, etc. How ironic it is that SNAP cards formally are prohibited from paying taxes! The government dare not make provision for those hidden taxes because doing so would expose their little charade! The next time an income tax advocate — especially those promising the “progressiveness” of the graduated income tax, or even so-called “flat-taxers” — try to tell you how regressive a sales or consumption tax is, don’t buy it.