Junjie Guo and Kim J. Ruhl
Executive Summary:
It is widely believed that sales taxes are regressive: The total sales tax paid by a low-income household represents a greater share of its income compared with a high-income household.
We show, however, that sales tax burdens are essentially equalized across income levels when computed over the household’s lifetime. The lowest-income Wisconsin households pay 2.1
percent of lifetime income in sales tax and the highest-income households pay 1.6 percent.
The lifetime tax burden is flatter because, regardless of income level, most after-tax income is consumed over the household’s lifetime. A household can do two things with its after-tax income:
spend it (consumption) or save it. Over the household’s life, most after-tax income is spent (average: 83 percent) and this does not vary much with lifetime income. The lowest-income households spend 94 percent of lifetime post-tax income on consumption compared with 75 percent for households with the highest post-tax income. What is not spent nor taxed away at the household’s end is left as a bequest. Since the sales tax rate does not vary by income, households end up paying similar shares of lifetime income as sales taxes.