A consumption tax is a broad category of tax that is levied on the consumption value of goods and services. Examples of consumption taxes include retail sales taxes, excise taxes, value added taxes, use taxes, taxes on gross business receipts (also known as business transfer taxes), and import duties. Consumption taxes are paid for by consumers rather than businesses, even though they may originally be paid by a business that passes the tax along to the consumer in the selling price. Consumption taxes are generally not collected by the government directly from consumers. Rather, they are collected by vendors at the retail level, who then pay the national or state taxing authority.
While the United States has no national consumption tax, many nations of the world have some form of national consumption tax. Value-added taxes (VATs) are a common form of national consumption tax in effect in most European countries, Canada, and elsewhere in the world. A VAT is one that is levied on the "value added" to goods or services produced by businesses. Such a tax is collected in stages from each business that contributes to the final market value of goods and services. While the VAT is collected by the state from businesses, the actual tax burden is passed along to consumers as part of the final selling price. Thus, the VAT is considered a consumption tax even though it is initially paid by businesses.
Similarly, import duties are considered consumption taxes, because the duty that is collected from the importer is passed along to the consumer as part of the final selling price. An import duty is charged on goods entering a country. The two most common types of import duties are an ad valorem duty, which is calculated as a percentage of the value of the goods being imported, and a specific duty, which is based on the quantity, weight, or volume of the goods being imported.
An excise tax is another example of a consumption tax that is initially paid by a manufacturer who includes the cost of the tax in the selling price to the consumer. An excise tax is applied to a specific commodity or type of goods, such as cigarettes, gasoline, or alcoholic beverages. Excise taxes that are designed to discourage consumption of a particular commodity for the benefit of society are known as sumptuary taxes, or more commonly as "sin taxes." Other excise taxes can be justified as a user charge on the basis of the benefit principle. In the case of gasoline taxes, it is reasoned that only those individuals who benefit from road and highway construction and maintenance have to pay the gasoline excise tax.
While consumption taxes such as excise taxes, import duties, and VATs are hidden from the consumer, the retail sales tax is a more visible consumption tax. The tax base for sales taxes was originally confined to merchandise or tangible goods. More recently, sales taxes have been applied to services as well, making them more of a consumption tax than a tangible goods tax.
Like other consumption taxes, the retail sales tax is considered a regressive tax. That is, individuals and families with lower incomes pay a greater proportion of their income for sales taxes than people with higher incomes. By exempting food and other necessities from the sales tax, it can be argued, some of its regressive nature can be mitigated.
The effects of a consumption tax are somewhat different from those of a production tax or income tax. A consumption tax tends to encourage savings and investment and discourage consumption. Excise taxes in particular are often used to regulate the consumption of certain goods, including luxury items, cigarettes, and alcoholic beverages. Those who put forth the argument for a national consumption tax in the United States point to it as a revenue source that could be used to reduce the national deficit and improve the nation's trade balance.
[ David P Bianco ]