One final matter of economic theory often raised in discussions of consumption taxes is their purported regressivity. It is an almost universally-accepted notion that consumption taxes are regressive--i.e., that they consume proportionally more of the income of the poor than of the rich. However, this assertion stems from faulty analysis. Consumption taxes are thought to be regressive because most economists measure regressivity by examining the portion of annual earnings which go toward the tax.
Using annual earnings as the basis for defining who is poor is misleading because it includes individuals who would not typically be thought of as poor. In fact, by this definition, virtually everyone qualifies as poor at some time during their life. That is because annual earnings are low for most individuals--"rich" or "poor"--during two specific phases of their lives: early-career and retirement.
It is widely believed that individuals "smooth" their level of consumption (relative to the fluctuations in their income) over the span of their lifetime. Therefore, while in these two "poor" stages of their lives, most individuals spend more than they earn (either because they expect their future income to rise appreciably, as in early-career, or because they have accumulated sufficient savings over their working years, as in retirement). As a result, while in these two "low-eamings" stages of life, virtually all individuals will indeed pay a proportionately larger share of their income in sales taxes than do those in the "higher-earnings" phase of life.
However, since most of these temporarily "poor" people will either someday enter or have previously been in the more lengthy middle-age, "higher-earnings" stage of their lives, indiscriminately including all of them in a group called "the poor" is misleading, and substantially overstates the regressivity of consumption taxes.
A more useful way of measuring the regressivity of a consumption tax is to examine the portion of lifetime--rather than annual--earnings which go towards such taxes. A recent National Bureau of Economic Research working paper by Gilbert Metcalf did just that. By looking at income over individuals' lifetimes rather than just during one year, Metcalf found that "rich people actually pay proportionally 1-1/2 times more of their income in sales tax than do the poor." Though Metcalf is not the first to note the serious flaw in using annual rather than lifetime earnings, the enduring belief that consumption taxes are regressive lives on.
In a 1993 study for The Mackinac Center for Public Policy, analyst Patrick L. Anderson addressed the regressivity issue, noting that despite frequent claims to the contrary, Michigan's sales tax is actually slightly progressive because "the proportional burden increases as income increases." The lifetime earnings factor cited above is one reason. Another reason is this: the sales tax (as well as the state's use tax) excludes food, prescription drugs, and most services, including rent. For many lower income taxpayers, food, drugs and rent comprise a very high proportion of their household spending. (As a statewide total, noted Anderson, sales and use tax revenue compared with personal income in the state indicates that about 45% of income is spent on sales-or use-taxable items.)