In The solution to income disparity? Consumption taxes, Timothy Taylor claims the following:

Why are VATs and sales taxes so unpopular? One common critique is that they are regressive. ... But if you measure a VAT or sales tax relative to total spending by individuals—the rich generally spend a lot more than the poor—those taxes actually look progressive.

The argument that higher value-added taxes is a great solution to income inequality, because it can fund cash transfers to the less fortunate, is hardly new to me. However, it is the first time I read that VATs may naturally be progressive, even without any cash transfer to the poor.

Is there any literature backing his claim?

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    Consider that food and housing are the biggest expenses, proportionate to income, for low-income families and those expenses are typically VAT free. – horatio Nov 2 '11 at 21:13
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    I think it would help with the research if you define "progressive" more precisely. Because under a definition of progressive taxes I'm thinking of, that quote in your Q is already 100% of the backing you're asking for, based on 3rd grade math as reference (10% of $1000 is > 10% of $100 and it's pretty obvious rich spend more than poor). – user5341 Nov 3 '11 at 4:50
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    @horatio: Where are housing and food VAT free? In the US? – user unknown Nov 3 '11 at 8:03
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    us, uk, ireland, australia, etc. I am sure you can find exceptions. ( customs.hmrc.gov.uk/channelsPortalWebApp/… ) ( telegraph.co.uk/finance/personalfinance/consumertips/7854289/… ) etc. – horatio Nov 3 '11 at 13:51
  • @DVK: A progressive tax is when the percentage taxed goes up as the taxable amount goes up. If you prefer, it means that the higher your income is, the percentage of your income that goes to tax goes up. A flat tax, however, is considered a regressive tax. – Borror0 Nov 3 '11 at 20:07

A 'progressive' tax does not mean that the rich pay more than the poor. A 'progressive' tax means that the rich pay proportionately more than the poor. A 'regressive' tax is one where the rich pay proportionately less than the poor.

Value added taxes are generally considered regressive.

The message from this data is unambiguous: the poorest 20% of households in the UK have both the highest overall tax burden of any quintile and the highest VAT burden. That VAT burden at 12.1% of their income is more than double that paid by the top quintile, where the VAT burden is 5.9% of income. VAT is, therefore, regressive.

However many countries make adjustments to make them more progressive, such as the UK which exempts basic necessities like food. With those adjustments VAT may be considered progressive according to a study examining the UK version specifically. Or it may not. Flat rate sales taxes with no exemptions are more likely to be regressive.

  • Your link on "considered regressive" contains a lot of information that answers the question. Bring that information here. You didn't attempt to summarize it. Good answers don't only link to the information, they summarize the evidence. See, for example, my answer to this question. – Borror0 Nov 3 '11 at 20:38
  • taxresearch.org.uk/Documents/ifs7.jpg shows that it's progressive regarding to spending. – vartec Nov 4 '11 at 13:13
  • @vartec If you read the entire document that graph came from - which I referenced above - you will find that it comes to the opposite conclusion. – DJClayworth Nov 4 '11 at 13:44
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    @vartec So a detailed study is "socialist propaganda" (and invalidated by the perjorative label you apply to it), but you choosing a single statistic that backs up your view is "hard data". – DJClayworth Nov 4 '11 at 13:54
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    @vartec: If you feel the data has not been properly presented, feel free to write another competing answer. – Borror0 Nov 4 '11 at 19:48

The very wealthy tend not to spend all that much of their money on things that are typically subject to consumption tax. According to Forbes (in 2006; much clicking needed to find the data), the only category where Americans with incomes in the top 20% vastly outspend those in the bottom 20% (fractionally) is in insurance and pensions, neither of which is normally taxed. (Forbes doesn't mention investment, but this also follows similar trends.) Even if you avoid taxing food, this really shifts the relative burden not "progressively" more to higher income earners, but centrally to middle-income earners.

If you added a VAT to second residences and to investments not covered by FDIC, then maybe there would be a case for progressivity. As it is, the article says (emphasis mine):

VATs and sales taxes tend to be more efficient and harder to avoid than income taxes.

which I would interpret as arguing that the best that can be said now is that there would likely be fewer loopholes in practice--but this is true of almost any changed system, since loopholes can take time to install. (That loopholes are the primary source of avoiding income taxes, at least for corporate taxes, is described here.)

  • Can you please add a relevant citation from the article? – Sklivvz Nov 2 '11 at 22:46
  • He has not talked about loopholes. If you think that he has, you're wrong. – Borror0 Nov 2 '11 at 22:58
  • @Sklivvz - Added citation for loopholes--both a quote the original article, which I take as an implicit acknowledgement, and a supporting link for the claim that loopholes, not just not-paying-taxes, is likely the major means of income tax avoidance. – Rex Kerr Nov 2 '11 at 23:35
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    @matt_black: Actually, it's the fact that consumption taxes can only be avoided by not spending your money. Thus, the worse scenario that can happen is that the tax forces you to invest, which means you'll have more money in the future. On the other end, income taxes encourage you to work less because it decreases the marginal value of additional work while the marginal cost stays the same. – Borror0 Nov 3 '11 at 1:44
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    @matt_black In practice VAT can be avoided quite effectively. In the UK, a registered business can claim back the VAT on purchases. Many wealthy people own business. To avoid VAT they transfer as many of their life expenses onto their business as possible. For those that work for companies, they take pay in non cash perks. For example using the company owned hunting lodge for holidays. – Rincewind42 Nov 3 '11 at 5:21

VAT is sales tax. It is not an income tax. Thus subject to taxation are personal and corporate expenditures. And as far as expenditure goes, VAT is in clearly and evidently progressive (dark green columns on figure below).

VAT vs expenditure
Source: http://www.taxresearch.org.uk/Documents/VATRegressive.pdf

Now, the argument is that poor spend more than they earn, while rich make savings, thus the first spend higher percentage of their income on VAT. There are however two flaws with this argument.

First, it is typical apples to oranges argument. VAT is sales tax, not income tax, so it makes absolute no sense at all to calculate VAT as percentage of income.

Second, as you can clearly see, even if you just look at income (light green on the figure), it's still progressive. Ironically, these facts don't prevent author of the referenced article from arguing, that VAT is regressive.

  • It's not a given that just because VAT is applied to spending, it's progressiveness should be applied as proportional to spending. If you took that argument to its limit, VAT is applied only to VAT-eligible spending, in which case the proportion would be exactly the same for everyone - i.e. the VAT rate. 'Progressiveness' is usually calculated as a proportion of income. Your argument about it being "progressive with respect to income" is also false, as the graph only shows VAT as a proportion of spending. It tells us nothing about VAT as a proporation of income. – DJClayworth Nov 10 '11 at 17:55
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    @DJClayworth: "A progressive tax is a tax by which the tax rate increases as the taxable base amount increases". – vartec Nov 11 '11 at 9:44
  • Please go to chat if you want me to explain more. – DJClayworth Nov 11 '11 at 14:32

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