Tuesday, October 2, 2012

Regressive Sales and Food Taxes


Given my ideological affiliations, I found myself generally agreeing with Galbraith’s assessment of the private and public sectors, and the need to tax the former to provide for the latter. That being said, I disagreed with his stance on sales taxes.

Galbraith calls out liberals like myself who believe in relatively low sales taxes (compared to income and property taxes) and exemptions in such taxes for necessities (primarily unprepared food), saying that “there should be no hesitation in urging high rates... [and] no sharp distinction can be made between luxuries and necessaries.” (Galbraith 228)

Liberals generally think of a sales tax, and especially one on food, as regressive because it would hit the poor hardest. The assumptions here are that (1) low-income persons spend a larger portion of their income (as opposed to saving/investing it) and (2) since they cannot afford luxuries, low-income persons devote more of this spending to food than do high-income earners. 

Looking at the data, not only are both of these assumptions supported, but so much so that I contend that high sales taxes with no exceptions for food, of the type Galbraith proposes, would likely have dramatic negative effects on the poorest members of society and only further the kind of poverty and inequality Galbraith is seeking to remedy.

I made some charts to illustrate my point. All the data is derived from the Bureau Of Labor Statistics Consumer Expenditure Survey. My charts use the 2011 data, but I looked at some earlier years and the same patterns hold true.

Some takeaways:

  • Individuals in the lowest quintile spend almost twice as large a share of their total expenditures on home-prepared food (generally tax exempt) as do those in the highest quintile.
  • All quintiles spend roughly the same portion (around 5%) of their expenditures on food away from home (generally taxable). This suggests that the non-exemption of food from restaurants is not regressive.
  • Low-income (first quintile) individuals spend over 35% of their income feeding themselves, while high-income individuals spend only 7%. This gap is even wider than the numbers tell, since high-income persons are undoubtedly buying higher quality (more expensive) foods than poor persons, and would probably be able to feed themselves for a significantly smaller portion of their income.

Granted, Galbraith is pushing for some fundamental shifts in the economic structure of society, so perhaps a high sales tax with no exception for unprepared food would do well for social balance in his “affluent society.” Given the current structure and systemic inequality, however, such a policy would undoubtedly and disproportionately hurt the poor and must be rejected by liberals like myself.

(one possible objection to this reasoning — suggested by Galbraith — is that the poor would benefit from their own taxation by the additional state services those revenues would provide. Given the vast absolute expenditure difference between the rich and the poor, however, it is not clear that the revenues collected from the lower quintiles would be significant contributions to state coffers, and those revenues from the higher quintiles may be target more effectively by something other than a blanket sales tax.)




Also, would someone please teach me how to get these charts out of excel and into the blog without them getting all messed up. I tried for like an hour and finally resorted to screen shots. There has to be a better way.




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