Consumption Tax versus Income Tax

Last updated on October 7, 2023

Income tax results from a taxpayer’s earnings, while consumption tax is charged on the products and services that an individual purchases. Even though most countries use income tax, this was not always the case. The United States has a history of principally using consumption tax and favoring it over income tax.

Some believe that consumption tax is more equitable than income tax, as lower earning individuals who spend less save more on taxes and vice versa. Both income tax and consumption tax have their own advantages and limitations; preference of one over the other depends on many factors, including economic and market influences. Though some believe consumption tax may be more reasonable, it is more difficult to charge. Millions of products and services are now in the market, and calculating taxes based on the purchase of every product and service is difficult. Such complex systems of charging taxes can lead to more errors in tax preparation and compliance.

Income tax is easier to charge, but it allows for legal tax evasion, as earnings can be manipulated to save taxes. Some believe consumption tax encourages savings, as taxpayers save taxes when they do not make purchases. Both methods of charging taxes have been implemented at various points in history by various countries, with no one method being superior to another.