What Is a Consumption Tax?

A consumption tax is a🎀 tax on the purchase of a good or service. ꦇConsumption taxes can take the form of sales taxes, tariffs, excise taxes, and other taxes on consumed goods and services.

A consumption tax 💫can also refer to a taxing system as a whole where people are taxed based on how much they consume rather than how much they add to the economy (like income tax).

How Consumption Taxes Work

Examples of consumption taxes include retail sales taxes, excise taxes, value-added taxes, use taxes, taxes on 澳洲幸运5官方开奖结果体彩网:gross business receipts, and import duties. These t⛄axes are borne by consumers, who pay a higher retail price for the good or service.

The higher price includes the consumption tax, which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity (such as ๊food) or a luxury (such as jewelry).

The consumption tax is not a new idea. The U.S. government used a consumption tax for much of its history before replacing it with an 澳洲幸运5官方开奖结果体彩网:income tax.

While the United States doesn’t have a national consumption tax, many othe🤡r countries have imposed some form of a national consumption tax.

Japan, for example, added a 3% consumption tax to its income tax in 1989. The Japanese Consumption Tax rose to 5% in 1997. In 2012, a two-part tax increase to double the tax raised it first to 8% in April 2014. It was originally scheduled to rise to 10% in October 2015, but two delays pushed it to October 2019. There are a few exemptions, including food and newspapers. For these items, the consumption tax is 8%.

Types of Consumption Taxes

Value-Added Tax

Most European countries and Canada have a consumption tax system in the form of 澳洲幸运5官方开奖结果体彩网:value-added taxes (VATs). In Canada, the VAT is referred to as a 澳洲幸运5官方开奖结果体彩网:goods and services tax (GST) in some provinces and a 澳洲幸运5官方开奖结果体彩网:harmonized sales tax (HST) in others.

A VAT is a tax on the difference between what a producer pays for raw materials and labor and what the producer charges for finished goods. Hence, t🍌his consumption tax is levied on the “value added” to goods andღ services from the production stage to the final consumption stage.

Excise Tax

An 澳洲幸运5官方开奖结果体彩网:excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior (that is, the purchase of certain goods). These excise taxes are also known as 澳洲幸运5官方开奖结果体彩网:sin taxes.

Import Duties

Import duties are taxes levied on an importer for gꦿoods entering the country. The importer passes o𒊎n these taxes to consumers by raising the cost of their goods.

The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.

Retail Sales Tax

The sales tax is usually 澳洲幸运5官方开奖结果体彩网:ad valorem; that is, it’s calculated by applying a percentage rate to the taxable price of a sale. Although there is a 澳洲幸运5官方开奖结果体彩网:sales tax in the U.S., it is a form of state tax, not a federal tax. In addition, state sales taxes exempt all sorts of spending, such as food, health, and hou๊sing. In contrast, countries that have implemented the sales tax as a federal consumption tax apply the tax to almost all goods and services.

Consumption Tax vs. Income Tax

Whereas a consumption tax is levied when people spend money, an income tax is levied when people earn money, or when they receive interest, 澳洲幸运5官方开奖结果体彩网:dividends, or 澳洲幸运5官方开奖结果体彩网:capital gains from their investments.

Supporters of consumption taxes say they encourage saving and investment and make the economy more efficient. In contrast, they say, income taxes penalize savers and reward spenders. So, they argue, it’s fairer to tax people on what they take via their consumption, rather than wꦫhat they make via their income.

Opponents say that consumption taxes are 澳洲幸运5官方开奖结果体彩网:regressive taxes: They ඣunfairly and adversely impact lower-income people who must spend a greater percentage of their i🅘ncome compared to higher-income people.

The Bottom Line

Whereas an ౠincome tax is levied when you earn money, a consumption tax is levied when you spend money. Examples of consumption taxes include sales taxes, excise taxes, value-added taxes, and taxes on i🏅mported goods.

Propone𝕴nts say that consumption taxes are fairer than income taxes, since there are ways to hide income. Critics say that consumption taxes discourage spending and adversely impact lower-income households.