UK Accounting Glossary
A consumption tax is a charge levied on spending for goods and services. Often a consumption tax will be a percentage of the total price of the purchased goods or services. A consumption tax is distinct from an income tax in that the latter is a percentage charge imposed on an entity’s earnings. Many local and state governments derive revenue from a combination of property taxes and various forms of consumption tax. Some municipalities and most states also collect income tax. The federal government collects most of its revenue from income taxes and the consumption tax. At the local and state level, a consumption tax may take the form of taxes on retail sales and excise taxes on gasoline, tobacco, and alcohol. At the federal level, the consumption tax is also imposed in the form of excise taxes, but there is no federal sales tax.
Political advocates of the consumption tax as a partial or full replacement for federal income taxes argue a consumption tax would have several advantages. A consumption tax would promote resource conservation by discouraging consumption, encourage saving and investing, simplify the current tax system, and collect more revenue from those who illegally generate income. Opponents of a federal consumption tax raise a number of objections. For one, a consumption tax is regressive. That is to say, low-income individuals would pay a proportionately higher share of their income in taxes relative to high-income earners. Also, a consumption tax would eliminate certain deductions/incentives available under the current income tax system (e.g. deduction for mortgage interest rate and eduction expenses, etc.).
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This glossary post was last updated: 4th February 2020.