Consumption Tax - Explained
What is a Consumption Tax?
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Table of ContentsWhat is a Consumption Tax?How Does a Consumption Tax Work?Value-Added TaxExcise TaxImport DutiesRetail Sales TaxConsumption Tax vs. Income TaxAcademic Research on Consumption Tax
What is a Consumption Tax?
A consumption tax refers to a tax, levy or tariff imposed on the purchase of goods and services. Consumption taxes are money or taxes that individuals pay on consumption, examples of such taxes are sales taxes, tariffs, value-added taxes, excise, among others. Taxes paid on what people spend is also referred to as consumption taxes, it is levied on whatever people consumed. Usually, consumer taxes are indirect and vary from goods to services.
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How Does a Consumption Tax Work?
Consumer taxes are paid on the purchase of goods and services, such taxes have a direct impact on the price that consumers for goods and services. When a consumer pays a higher retail price for a good or service, it is an indicator that consumption ta has been levied by the tax authority. The retailer or vendor remits consumption taxes charged on goods and services to the government. Examples of consumer taxes are; use taxes, excise taxes, value-added taxes, and retail sales taxes. In the United States, consumption tax has been in use for a long period, this tax is levied on various commodities, items, and services. Although the national consumption tax does not exist in the United States, many countries have imposed national consumption tax, including Japan.
It is believed that value is added a product right from the point of production until it is put up on sale through the supply chain. A value-added tax (VAT) is a goods and services tax imposed on products based on how much value is added to them from production to distribution or sale. In Canada and many European Countries, the consumption tax system is in the form of VATs which is often described as a Goods and Services Tax (GST) or Harmonized Sales Tax (HST). goods and services that add values to individuals are taxed based on the amount spent on the raw materials and labor invested in the production of the goods.
An excise tax refers to a tax levied on specific products and services at the point they are manufactured and not when they are sold. Goods such as gasoline, tobacco, alcohol attract excise tax. Excise taxes are otherwise known as sin taxes, these are taxes levied of some classes of products and services to discourage their purchase or use because they may have negative impacts on the economy. For instance, excise tax can be levied on tourism, wagering of truck's passage on the highway. Individuals who benefit from such services and products are also required to pay taxes such as tax paid on gasoline, purchase of alcohol and tobacco and others.
Import duties refer to taxes that the government imposes on goods brought from a foreign country. Such taxes are levied to discourage the purchase of foreign products and encourage the purchase of domestic or local products. When levied on products and services, import taxes create an increase in the price of imported goods and thereby become too expensive for many consumers to purchase. Income duties are otherwise called import tariffs or taxes, they are levied on all goods imported from other countries into a country. Import duties are collected by customs and the value is determined by the nature, quantity, and weight of the imported goods.
Retail Sales Tax
Retail Sales Taxes are otherwise called ad valorem paid by retailers to a governing body on the sale of goods and services to final consumers. Sales taxes are levied on the sale of goods and services to consumers and the tax is levied on retailers every time they make a sale or render a service. In the United States, sales tax is a state tax and not a federal tax, it is calculated by percentage rate to the taxable price of a sale. In some countries, the retail sales tax is being used as a consumption tax.
Consumption Tax vs. Income Tax
There is a clear distinction between the consumption tax and income tax. While a consumption tax is levied on the purchase of goods and services, income tax is levied on the income earned by individuals. Income tax is charged when people receive money while consumption tax is charged when people spend money. According to the supporters of the consumption tax, it encourages a savings culture which is good for the economy. Critics of consumption, however, argue that wealthy families and high-income individuals may not feel the impact of the consumption tax. But this tax negatively affects low-income individuals and poor households because they are compelled to always spend their income.
Academic Research on Consumption Tax