A consumption tax is basically a tax you pay when you buy something, whether it’s a product or a service. These taxes can show up as sales taxes, tariffs, excise taxes, and other types of taxes on what you consume. It can mean a whole system where people are taxed based on their consumption levels instead of their income, which is how income tax works.
How Consumption Tax Works
Examples of consumption taxes are things like retail sales taxes, excise taxes, value-added taxes, use taxes, taxes on gross business receipts, and import duties.
These taxes are paid by consumers, who end up shelling out more for the goods or services they buy.
The increased price includes the consumption tax, which the vendor collects and sends off to the right federal, state, or local government.
Consumption taxes often vary in rates depending on the type of product, based on whether it’s seen as a necessity (like food) or a luxury (like jewelry).
The concept of it isn’t new. The U.S. government relied on a consumption tax for a big chunk of its history before switching to an income tax.
Even though the United States doesn’t have a national consumption tax, plenty of other countries have implemented some version of it.
In 1989, Japan introduced a 3% consumption tax on top of its income tax. Then, in 1997, the Japanese It increased to 5%. Fast forward to 2012, there was a two-step tax hike that first brought it to 8% in April 2014. Although it was supposed to go up to 10% in October 2015, two delays pushed that back to October 2019. There are some exceptions, like food and newspapers, which are taxed at 8%.
Some Types
- Value-Added Tax
- Excise Tax
- Import Duties
- Retail Sales Tax
Conclusion
While an income tax is charged when you make money, a consumption tax is charged when you spend it. Some examples of consumption taxes are sales taxes, excise taxes, value-added taxes, and taxes on goods that are imported.
Supporters argue that consumption taxes are more equitable than income taxes because it’s possible to conceal income. On the other hand, critics claim that consumption taxes can deter spending and negatively affect households with lower incomes.