A National Sales Tax Holiday and progressive taxation


Rep. Lindsey Graham (R-SC), along with several House and Senate legislators on both sides of the aisle, want to enact a 10-day sales tax holiday. From the text of the legislation (available at http://www.senate.gov; search under H.R. 3172):

In other words, for 10 days, states charge no sales tax. The federal government them reimburses them for the taxes lost at a later date. The idea, of course, is to boost the sagging economy with temporary tax relief.

Support for this bill has begun to crop up from various lobbying and interest groups; for instance, the National Retail Federation.

So, up for debate here is: is this bill a good idea? Economically, I can see the merits. It’s plausible that a sharp spike in demand could be enough to kickstart the economy.

But, on the other end, there’s a subtle irony here, at least from the GOP’s perspective. The bill specifies that the Secretary of the Treasury shall reimburse the states with federal money. But money does not grow on trees–and federal coffers are funded, by and large, by the upper tax brackets.

So there’s a progressive taxation issue. Is it fair (or “right,” as it were) to unload 10 days of sales taxes that are ordinarily owed on a flat-percentage basis onto the richer taxpayers?

I think not. Personally, my opinion is out for lunch on progressive taxation in general, but this is taking it too far.

What do you think?

Smoker4: *The bill specifies that the Secretary of the Treasury shall reimburse the states with federal money. But money does not grow on trees–and federal coffers are funded, by and large, by the upper tax brackets.

So there’s a progressive taxation issue. Is it fair (or “right,” as it were) to unload 10 days of sales taxes that are ordinarily owed on a flat-percentage basis onto the richer taxpayers?*

Actually, I think that might be a kind of skewed way to look at it. Unless somebody is proposing an increase in progressive federal taxes specifically to reimburse the states for the sales tax suspension, we are talking about funds already in the federal coffers, collected under the existing system of tax rates. The real fairness issue then, to my mind, is not where this reimbursement money originally came from, but where it would have gone in the absence of a sales tax holiday. What federal spending is going to be cut to make up for this reimbursement, and who would have benefited from that spending? They’re the ones who are actually making the sacrifice, IMHO.

My biggest objection to the sales-tax holiday, on the other hand, is just that I don’t think it’s likely to do much real good. The country’s retailers are in favor of it, understandably, as this editorial by the President of the National Retail Federation indicates:

But it sounds to me like a quick shot in the arm that’s unlikely to have much long-term effect. It’s kind of like the “Gas-Out” days to protest high gasoline prices, when people would send emails urging everybody not to buy gasoline on Thursday the whateverth. Unless you actually reduce your gas consumption instead of just deferring it, you’re not actually changing the amount of demand, so you’re not sending any message at all to the oil companies! Similarly, most people would probably use a sales-tax holiday period to cram in a bunch of purchases that they wanted to make anyway (especially big-ticket items), but make up for it by reducing consumption afterwards. I don’t think any serious economic problems are really going to be solved by this kind of quick fix.

Not only that, but I—for one—don’t even notice sales tax. It doesn’t count as a noticible portion of my expenditures. Hell, if they handed me a check for a “Sales Tax Refund” I wouldn’t even notice it.

I mean, ten days? Figuring about a 6.5% sales tax rate for me, which I don’t know if it is because I don’t much care, I would save approximately… [screws eyeballs and scrunches forehead]… $3.25. If i squeezed in all my holiday shopping right then I might save seven bucks.

Whoop-de-doo. :wink:

Of course, there’s the Tennessee problem. Thanks to the governor’s mismanagement of the state’s budget (which gets something like 99% of its income from sales taxes), we’re nearly bankrupt, so if this plan goes through, that will be more ammo for those dunderheads in the statehouse who want an income tax. Yes, we all know that money’ll be refunded thanks to Uncle Sam, but he’ll do it in his own sweet time, and they’ll have to pass an income tax in the meantime to make up for it. (But we can’t have a state lottery! No, that would be unfair to the poor! [And sales tax on food isn’t?] :rolleyes: )

Well, I am a bit ambivalent on this idea…although a little more positively desposed to it than kimstu (as I do not agree that it will be completely just a change in when people spend the money…I think they really might buy a bit more in net).

However, what the OP worries about is exactly what I find somewhat refreshing about the idea…Usually, when talk of stimulating the economy comes up, the idea is to throw lots of money at rich people through capital gains tax breaks and the like, with the claim that it will trickle down. So, it is sort of nice to see a proposal that is more like trickle-up than trickle-down. And, in fact, I think that it is much more likely to be effective than trickle down in stimulating an economy that has gone south not because of lack of investment but due to a drop-off in demand.

On the other hand, I have heard some argue that even such tax breaks for working folks may not be too stimulative now because the whole uncertainty in the world means that even such people are more inclined to save than spend, as are businesses. In that sense, if ever there was an economic situation that would respond best to just good-old-fashioned government spending more than anything else, this is it.

I think you’re a little too optimistic, jshore! For one thing, as I said, I’d like to see where in the budget the federal reimbursement funds would be cut from before I concluded that such a measure would really increase redistribution from the richer taxpayers to the poorer.

For another, I’m a little dubious about the “pay now, save later” aspects of the proposal. As the above editorial stated quite frankly, the purpose of the measure is to get consumers to increase their spending. In other words, plunk down a wad of cash now, and transfer it to the retailers and manufacturers. Then we may see a boost to the sagging economy, and that may translate into sustained increases in production, and we may keep the economy active enough so that we don’t lose more jobs, your employer can afford not to fire you, and things will be fine.

Or if the economy tanks anyway, hey, at least the retailers and manufacturers will have your money, and you’ll have a new computer and new car that you could sell at a yard sale if any of your neighbors could afford to buy them.

Once again, I’m a little suspicious about how all these exhortations about the need to rescue the economy seem to target the consumer, and only the consumer. “Keep spending! Keep spending! Never mind worrying about whether you can afford it! Here, we’ll give you a tax incentive!” Where are the special tax incentives for businesses not to lay people off, or the special payroll tax reductions directly targeted to the working class, or the special education and development incentives and extended unemployment benefits and so forth? I’m not quite happy about the notion that the only people who should be expected to put the good of the economy ahead of their own short-term financial interest are the consumers.

I think it’s a goofy idea. First of all, a state should collect whatever sales tax it chooses to on a steady basiss. It’s silly and demeaning to eliminate the tax for some 10-day period.

Second, it makes no sense for the Federal Government to give money to the states in lieu of state tax. This sort of thing makes tax collection and voting even more removed from the tax-payers. It also invites Federal administrators to attach strings to the money they give the states.

I agree. Particularly since we have a world-wide economy, lots of American consumer spending will go for goods manufactured abroad.

All tax cuts encourage businesses to not lay people off, because they make the bottom line better. In addition, they encourage new businesses to start up and existing businesses to expand.

The trouble is that Congress is accustomed to giving money to their supporters, using the excuse of helping the economy. Neither party has much integrity when the term economic stimulus" starts floating around.

december: All tax cuts encourage businesses to not lay people off, because they make the bottom line better.

Yes, but by the same token, all tax cuts also encourage consumers to keep spending. I’d just like to see one such incentive requiring somebody other than the consumer to put their own money on the line in order to get a tax break. Just for a change.

(I will get this goddamn chapter finished tonight! :))

It’s a stupid idea. The only situations where it makes a difference at all is on big tickets items (I mean you arn’t really going to go out to buy a bunch of pencils because you can save a cent each), and big ticket items are not usually impulse purchases. Thus, people won’t actually be spending more.

There is a word for this sort of thing. It’s called a gimmick. Gimmicks are low on reality value and high on getting-reelected value.

Moves like this encourage a skewed view of taxes. It presents them as a punishment that can be lifted rather as s vital part of our system of government.

Let’s see. It is not enough that New York is being welched out of $10 billion previously pledged. Now it stands to lose another $100 million on top of that if this bill passess.

kimstu, I guess I don’t really disagree with anything you said there. Perhaps this proposal just looks good by comparison to the tax giveaways to the rich and corporations that seem to be otherwise dominating the debate on economic stimulus.

Almost by definition state lotteries are unfair to the poor. How many millionaries buy state lottery tickets? Even those who need a gambling fix will tend to go to Las Vegas or Atlantic City. Is there a more regressive form of taxation than a state lottery? Oh wait, but no one is forced to buy a ticket. Yeah, that’s true, but no one is forced to buy yachts and fur coats either, but we know what happened to the luxury tax.

Anyway, so this isn’t a total hijack, I agree the sales tax holiday idea is pretty stupid, although not nearly as stupid as some of the other “stimulus” ideas passed by the House. At least the damage is short term. Most of the other House ideas seem to involve long term loss of revenue, like eliminating the alternative minimum tax (which was championed by that tax-aholic Reagan!).

A 10 day tax holiday. Great, means everyone will defer big ticket items until those 10 days, so spending goes down until then. A chunk of people will bring forward spending on big ticket items, so spending will go down after those 10 days. Then there is the one time non-seasonal jump in sales because of the tax holiday.

How am I supposed to do my planning on production, inventory, reorder levels, staff hiring, etc.? Just got hit with a one off anomaly, and then have to try figure out what’s “real” or “sustainable” and what isn’t.

Could someone fill me in on Federal revenues? These come primarily from the upper tax brackets? How upper? The same 1% that benefit the most from tax rebates? I haven’t looked at this in years, but I’m under the distinct impression that “real” individual income taxes (eg, those actually paid and not what the rates are on paper) are regressive and not progressive.

China Guy,

I don’t have the numbers handy at the moment, but I do think that federal income tax is somewhat progressive even in reality…i.e., the rich pay a somewhat larger percentage than the poor, although it is certainly less drastic than the rate brackets show due to various tax shelters, the 20% rate for long-term capital gains, etc. (At any rate, the top 1% certainly pays a significant chunk of the total tax due to their extraordinarily high incomes.)

However, the reason that I “bolded” both “federal” and “income” is because:

(1) State income taxes tend not to be very, or at all, progressive.

(2) Discussion only of income taxes leaves out other very important taxes. For example, federal payroll taxes are not at all progressive…They are a flat percentage of earned income up to a certain point and then the S.S. part cuts out at a cap. This makes them regressive both because of the cutting-out part and the fact that they apply only to earned income. (E.g., only a small fraction of G.W.'s income is “earned”…most of it is interest, dividends, and capital gains.) This, of course, is not to even mention state sales taxes.

So, when the Bush folks say that the richest 1% get the biggest break because they bear the biggest burden, they are not completely lying but are deceiving on two fronts. One being that they are conveniently considering only the most progressive type of taxation in making this statement. [And like the bottom 40% pay more in payroll taxes than they do in income taxes.] The second is that (I believe) that the 40-odd percent of cuts that will go to the top 1% of earners under the plan currently being phased in is even a bit…although perhaps not very…out of proportion with their burden of the federal (personal) income tax (which I thought I remember being 30-odd percent of the total income tax collected).

It is probably no coincidence that the two types of taxes targetted by the Bush administration (estate tax and income tax) are also the two most progressive forms of taxation.