Know Your Taxes: Consumption Tax

Consumption tax is a tax on goods or services.  In the United States, consumption taxes have an important place in American history; the Boston Tea Party was a revolt against the British imposed consumption tax on tea.

In modern times, consumers pay a variety of consumption taxes.

Sales Tax:  Many of our purchases are subject to sales tax.  A sales tax is paid to the vendor who then remits the tax to the government; this tax is calculated as a percentage of the overall sale.  The percentage varies based on the state and city.   Most food items are exempt from sales tax.

Value-added tax (VAT):  More common in Europe, a VAT is a tax on purchases for consumers and a tax on the difference between cost and retail value for businesses.

Excise Tax:  An excise tax is a tax placed on a certain type of item, often alcohol and gasoline, among other items.

Expenditure Tax:  This form of a consumption tax taxes the difference between income and savings.  As people consume more, they pay more.  This tax is much less common and has only been implemented in India and Sri Lanka.

There are many who argue against consumption taxes because they put a heavier financial burden on the poor who still must buy items necessary for survival but have less disposable income with which to buy both the necessities and to pay the subsequent taxes.  Furthermore, the poor have less money to save; what they earn, they typically must spend for survival.

Despite these objections, many have argued that a VAT should be implemented in the United States to cut the deficit.  While opponents acknowledge the tax could put an burden on the poor, they see a consumption tax as the only way out of our current national deficit.

For more information, see Bloomberg’s Consumption Tax Would Make U.S. Deficit Reduction Easier: View