Taxes Charged on Income or Consumption?

Last updated on January 28, 2022

Are taxes charged on income or consumption better? That is exactly what some Republican governors are debating. Cutting personal and corporate taxes and increasing sales tax is currently being contemplated. Making their states attractive to investors has always been the strategy to increase jobs by states, and increasing of sales tax will help with that.

Taxing on consumption and not income has its advantages. It helps people save and invest more, but it is an unfair taxation system where the rich pay fewer taxes than the middle and lower-income groups. Taxpayers who earn equal or a little more than what they spend pay more taxes than those who earn much more than what they spend.

Simplification of the tax system is now being discusses, but the shifting of taxes from income to consumption is not going to simplify the federal tax system. Charging how much tax on which commodities is a daunting task in today’s market where there are millions of products.

Skeptics predict that greater sales tax, even if implemented in a few states, will not become a broad trend in the US. States that have lower personal and corporate tax rates might be tempted to move to a consumption tax to increase revenues, but states like California, that are getting more from personal and corporate taxes wouldn’t welcome the change.

Just because tax laws change do not necessarily mean they become uncomplicated. The consumption tax is an option and may work, but there still remain questions that need answering. So the debate drags on.