Question

Sales taxes are fairer than income taxes because sales taxes cannot be avoided by the rich Discuss evaluate this idea , using tax policy concepts to provide support for your evaluation , Is it possible to design a sales tax that is more progressive than a personal income tax

Answer 1

Sales taxes are regressive in nature. Income tax is a direct tax and it is progressive in nature. Progressive tax means that with increase in income fraction of income paid as taxes increases; there is an increasing tax rate. Hence burden is more on rich.

Regressive tax means as income increases, the fraction of income paid as taxes decreases; there is a decreasing tax rate. Hence burden is more on poor.

Hence sales taxes are not fairer as poor pay a larger fraction of their income which goes against 'ability to pay' principle of equity. it is true that sales tax cannot be avoided as everyone has to pay. As poor pay more fraction that is why it is derogatory for them. Sales tax can also be avoided if a buyer agrees not to take a bill.

Generally value added tax gives tax input credit and it should be used to reduce tax burden and to design sales taxes based on value-added tax is better.. However, unless a consumption based tax is not imposed it is not possible to design a sales tax that is more progressive than a personal income tax.

The only option is to tax different income earners different sales tax rates but practical implementation is difficult.