Consumption Tax

Consumption tax

See: Value-added tax

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consumption tax

A tax levied on individual commodities or services and included as part of the retail price of those commodities or services paid by consumers. For example, a 25¢ tax levied on a pack of cigarettes is a consumption tax. Consumption taxes are advocated by many people as an inducement to increase savings in the economy. These people argue that the present taxation of income penalizes savers and rewards spenders. Compare excise tax, value-added tax.

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Consumption Tax

A tax only on income that one spends on goods and services. A common example of a consumption tax is a sales tax. Most countries have consumption taxes at some level and proposals exist in the United States to shift from a mainly progressive tax system to a system that utilizes consumption taxes predominantly or exclusively. Proponents of a consumption tax argue that it encourages saving and makes the economy more efficient, while opponents maintain that it adversely affects the poor, who must, by necessity, spend more of their income.