What is Consumption Tax & How to Implement It

Last updated on October 15, 2021

The search for alternative methods to collect taxes reaches consumption tax at some point. Consumption tax is charged on items of consumption. In some countries, consumption tax is charged along with income tax. Taxpayers pay consumption tax on some items, especially on luxury items, in some countries and also pay taxes on their income.

Some people debate that instead of charging taxes on income, it would be advantageous to charge taxes on spending. Although choosing consumption tax over income tax might sound a better choice, implementation of consumption tax is a concern.

For implementing consumption tax, every item of sale will need to be taxed, no matter how small. That is a mammoth task that can be difficult to execute even on state level.

Taxpayers who have retired may find this change unacceptable because they spent their lives paying taxes on their income and might not like to pay additional taxes on things they buy after they have retired.

Leaving practicality aside, an advantage of consumption tax is that it limits excesses on its own. As taxes increase, consumption will decrease. Consumption tax can also be beneficial for middle and low-income groups, as under the present income tax system they pay more taxes than the rich and super-rich.

Under consumption tax, the rich will pay according to how much they spend and on what, but as their savings are more than those of middle and lower-income groups, they will benefit from consumption tax.

If consumption tax can beat income tax in both theory and practicality, it might just become the dominant tax in the future.