Overview of Consumption Taxes
A consumption tax is a tax levied when purchasing goods and services. Consumption taxes are usually included in the price paid by the final consumer. Common types are sales taxes, value-added taxes, and excise taxes. They provide income for governments rather than taxing what individuals earn.
How Consumption Taxes Function
Consumption taxes apply every time money is spent, thus rewarding savers and penalizing spenders. Tax rates vary by location and product type, with necessities often having lower rates than luxuries.
Advantages and Stability
Compared to other tax revenue sources, consumption tax revenue as a share of GDP tends to be relatively stable over time, even during economic downturns.
Disadvantages of Consumption Taxes
The downside of consumption taxes is that they are a regressive tax because lower-income earners and households tend to spend a higher percentage of their income than higher-income earners, who are more likely to save. Technological progress, which depends on investment into research and development, suggests that investment not only impacts the level path but should also affect the long-run growth rate.
Types of Consumption Taxes
There are three main types of consumption taxes:
- Sales taxes
- Value-Added Taxes (VAT)
- Excise taxes
While sales taxes and VATs usually apply to a broad set of goods and services, excise taxes are targeted at specific products. Each person can qualify for exemptions and deductions under these systems.