Consumption Taxes

Arguments for a Consumption Tax

Supporters argue that the consumption tax encourages savings as it discourages spending and consumerism. With decreased spending and consumerism, there would be less waste of resources, less material produced, and an overall improvement in the natural environment as fewer demands are placed on it. In this way, the consumption tax would promote efficient use of resources and protects the environment. However, for the same reason it is also seen as a hindrance to the growth of the consumption or consumer-based economy. Business interests are placed at the opposite end of environmental protection. Proponents of the consumption tax also argue that an income tax encourages spending and consumption while penalizing savings, investments, and innovation, thereby damaging the economy in the long term. Finally, proponents of the consumption tax argue that the income tax taxes what people contribute to society in terms of work, while a consumption tax taxes what people take from or what resources people use in a society. Therefore, a consumption tax is just in that it distributes or places the burden (tax) on those that benefit (use the resources).

Arguments Against a Consumption Tax

Opponents argue that a consumption tax would require a higher tax rate to raise the same amount of revenue and so there may be an adverse impact on the balance of work and leisure. Opponents also argue that a nominally flat consumption tax can be regressive, shifting the greater burden on the working class, because returns to savings and investments would not be taxed, which constitutes a greater percentage of wealthier people's incomes. Another objection to the consumption tax used to be that it is difficult to monitor how much people save. However, in practical terms, a consumption tax would essentially be the equivalent to unlimited access to tax-deferred individual retirement accounts, with no penalty for early withdrawal except for payment of taxes on the withdrawn savings.

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