Question

Explain how an increase in sales tax affects different income groups.
(Income groups are: lower-income people and higher-income people)

Answer 1

Poor people spend a little more than they earn (because many of them are students, entry-level employees, between jobs, or just starting a family). Richer people spend less than they earn (mostly because the peak earning years are in the 40s and 50s -- when most folks are saving for retirement).

So an increase in sales tax would take up more of the income of a poor person, and less of a rich person.

For example, let's say Poor Pete earns $20,000 a year, but spends $25,000. A 1% increase in sales tax costs him another $250 a year, or 1.25% of his income. Ruth Rich makes $100,000 a year, and only spends $70,000. A 1% increase in sales tax costs here $700, or just .7% of her income.

Answer 2

Thank You!