What Is a Consumption Tax?

A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take the form of sales ⛄taxes, tariffs, excise taxes, and other taxes on consumed goods and s♎ervices.

A c🌺onsumption 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 a♓dd 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开奖号码历史查询:gross business receipts, and import duties. These taxes are borne by consumers, who pay a higher retail price f🍬or 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 comm𝄹odity 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开奖号码历史查询:income tax.

While the United States doesn’t have a national consumption tax, many other countries have impos🐓ed 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开奖号码历史查询:value-added taxes (VATs). In Canada, the VAT is referred to as a 澳洲幸运5开奖号码历史查询:goods and services tax (GST) in some provinces and a 澳洲幸运5开奖号码历史查询: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, this cons🧸umption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage.

Excise Tax

An 澳洲幸运5开奖号码历史查询: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开奖号码历史查询:sin taxes.

Import Duties

Import duties are taxes levied on an importer for goods entering the country. The import♔er passes on 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开奖号码历史查询: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开奖号码历史查询: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 housing. 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开奖号码历史查询:dividends, or 澳洲幸运5开奖号码历史查询: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 what they make via their income.

Opponents say that consumption taxes are 澳洲幸运5开奖号码历史查询:regressive taxes: They unfairly and adversely impact lowe🃏r-income people who must spend a greater percentage of their income compared to higher-income peop🅰le.

The Bottom Line

Whereas an income tax is levied when you earn money, a consumption tax is levied when you spend m𒁏oney. Ex🐟amples of consumption taxes include sales taxes, excise taxes, value-added taxes, and taxes on imported goods.

Proponents say that consumption taxes are fairer than income taxes, since there are ways to hide income. Critics say that consumption taxes discourage spending a♚nd adversely impact lower-income households.