Is Consumption Tax the Answer?

Last updated on June 10, 2022

Consumption tax is the tax charged on the consumption of goods and services, whereas income tax is tax charged on income. Both consumption tax and income tax have their advantages and disadvantages, but income tax has been given preference over consumption tax by most world economies.

There has been much debate over the complexity of the tax code. The complex tax code is making it difficult for most taxpayers to understand their tax duties and is also forcing the government to spend billions in tax compliance. Everybody agrees that the tax code must be simplified, but how to bring about that change is a matter of debate.

Congress has proposed the introduction of FairTax. In FairTax, taxes will be charged on consumption, where customers will pay a tax of 23% on the final sales of goods and services. It sounds simple and fair, but studies have shown that it might increase market volatility and lead to uneven taxes.

Charging taxes on commodities in itself is difficult to implement. The many loopholes that can be exploited by businesses to evade taxes need to be considered. Some speculate that state-level financial transaction tax might increase the economic uncertainty and not lead to the results expected of it. The U.S. Senate passed a bill that may enable states to impose their own financial transaction tax.

Keeping the fragility of the economy in mind, Congress cannot reach a resolution that might or might not work. FairTax might simplify the tax code, but the cost for that must not be greater than the advantage.