Sales tax is regressive or proportional?

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Question: 

In Arizona we have a 5.6% sales tax. Arizona's public school system tried to teach me that sales tax is a regressive tax. I argued that its a proportional tax because regardless of income all consumers have to pay 5.6%. They argued that sales tax puts a burden on lower income families so it's a regressive tax.

Answer: 

First, it is important to understand what a proportional or regressive tax means. A proportional tax system requires all taxpayers to pay the same proportion of their income regardless of how much money they earn. Whereas, under a regressive tax system, the higher income earner pays a smaller fraction of their income as tax than those with lower income. Following this, the sales tax of 5.6% is considered regressive. Take an example- Consider two individuals – individual A earning $10,000 and individual B earning $15,000. Now suppose both make a purchase worth $1000. In this case both individuals pay a tax of 5.6% on $ 1000 i.e. $56 and a final price of $1056. For individual A, $ 56 is a higher proportion of his income (56/10000)×100 = 0.56%). Whereas, individual B is paying a lower proportion of his income as tax (56/15000)×100 = 0.37%). Therefore, the higher income individual B pays a lower fraction i.e. 0.37% of his income as tax, whereas the poorer individual A pays a higher proportion i.e. 0.56% of his income as tax. Hence, the sales tax is considered regressive.

However, exempting essential commodities like basic food or medicines from sales tax makes it less regressive.

Answered by:
Sanjukta Mitra
Ph.D Student
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Last updated on July 21, 2022