Consumption tax

A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax. However, a consumption tax can also be structured as a form of direct, personal taxation, such as the Hall–Rabushka flat tax.

A value-added tax (VAT) applies to the market value added to a product or material at each stage of its manufacture or distribution. For example, if a retailer buys a shirt for $20 and sells it for $30, this tax would apply to the $10 difference between the two amounts. A simple VAT would be proportional to consumption but would also be regressive on income at higher income levels, as consumption falls as a percentage of income. Savings and investment are tax-deferred until they become consumption. A VAT may exclude certain goods to make it less regressive. It is used in European Union countries.

In Australia, Canada, New Zealand and Singapore, it is instead called a Goods and Services Tax (GST). In Canada it is also called Harmonized Sales Tax (HST) when it is combined with a provincial sales tax.

A sales tax typically applies to the sale of goods, sometimes also to the sales of services. The tax is applied at the point of sale. Laws may allow sellers to itemize the tax separately from the price of the goods or services, or they may require it to be included in the price (tax-inclusive). The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. When a tax on goods or services is paid to a governing body directly by a consumer, it is usually called a use tax. Often laws provide for the exemption of certain goods or services from sales and use tax.

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