Greenspan said the tax code needed to be simplified and suggested one idea worth considering was implementing some kind of consumption tax. William Gale is a senior fellow at the Brookings Institution. And Len Burman is a senior fellow at the Urban Institute. William Gale: What does it tax? A consumption tax essentially taxes people when they spend money. Now one way to think about a consumption tax relative to the existing income tax is suppose we had our current system, but we made IRA contribution limits infinity, so you could put as much as us wanted into an IRA and you could take it out for any reason, all right.
That to the first order of approximation would be a consumption tax. Len Burman: Well, yes, quite close. Eberly and James H. Ray Suarez: And for people who are sitting with receipts on week nights and pieces of paper and an adding machine trying to figure out as April 15 looms, this would mean filing a tax return would become a very different business from what it is today.
Len Burman: Yeah, it depends on how you implemented the consumption tax. Is it as simple as just a new sales tax? William Gale: Not really. The sales taxes that exist in the states may serve the purposes of the states quite well, but they are very poor models for a federal consumption tax.
The state sales taxes omit all sorts of spending, typically health, food is often omitted, a variety of other things, housing. Health, food and housing is half of all consumption. Len Burman Robert C. So, if we want to have a consumption tax at the federal level we need to tax a very broad base of consumption, almost all consumption.
Alan Greenspan said today getting from the current tax system to a consumption tax raises a challenging set of transition issues. Like what? That would be like a 60 percent tax on all of the money that you had saved up over the course of your life.
And there are other transition issues too, like the way it affects businesses. There are variants on the consumption tax, but basically nobody has figured out how to deal with the transition issues without tremendous cost to the Treasury. You can basically say you could have transition rules that would try to protect old people, that would try to protect businesses that have made investments under the old rules that could be harmed under the new system, it would be tremendously expensive.
But underneath that umbrella, would people be paying roughly the same amount of tax if we move to a consumption tax? Or are we assuming that different people would pay more or less than they used to pay? Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A consumption tax is a tax on the purchase of a good or service.
Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services. A consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy income tax.
Examples of consumption taxes include retail sales taxes, excise taxes, value-added taxes, use taxes , taxes on gross business receipts , and import duties.
These taxes are borne by consumers who pay a higher retail price for the good or service. The higher price includes the consumption tax, which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity such as food or a luxury such as jewelry.
The consumption tax is not a new idea. The U. The Bush administration backed a version of this, although the proposal was defeated. The proposal called for the United States to shift from a mainly progressive income tax system to a national tax system that utilizes consumption taxes exclusively.
Ideally, a properly designed consumption tax system would reward savers and penalize spenders. While the U. Most European countries and Canada have a consumption tax system in the form of VATs, or value-added taxes. A VAT is a tax on the difference between what a producer pays for raw materials and labor and what the producer charges for finished goods.
An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy.
These excise taxes are more commonly known as sin taxes. Other excise taxes are applied to people who benefit from a program or infrastructure. For example, taxes on gasoline are collected from drivers to maintain roads, highways, and bridges. Import duties are taxes levied on an importer for goods entering the country.
The taxes are passed on by the importer to final consumers through higher costs. The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors.
Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported. The sales tax is usually ad valorem , that is, it is calculated by applying a percentage rate to the taxable price of a sale. Although there is a sales tax in the U. In addition, state sales taxes exempt all sorts of spending, such as food, health, and housing. Countries that have implemented the sales tax as a federal consumption tax, tax almost all consumption.
A consumption tax is charged to people when they spend money. An income tax is levied on people when they earn money or when they receive interest, dividends , or capital gains from their investments. Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders.
Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income. On the other hand, opponents maintain that a consumption tax adversely affects the poor who, by necessity, spend more of their income.
They state that since a consumption tax is a form of a regressive tax , the wealthy population consumes a smaller fraction of their income than do poorer households.
The New York Times. International Monetary Fund. Accessed Dec. Research Institute of Economy, Trade and Industry.
The Japan Times.
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