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The broadest category of taxation is arguably consumption taxes, and can generally be split into three categories: Sales taxes, Value added tax (known as Goods and Services Tax in commonwealth countries) and, Excise taxes. Together, they tax the sale or manufacturing of most consumer goods with some exceptions. Since, the cost of these taxes can be factored into the price of the item being taxed, the consumer ends up footing the bill. Let us evaluate the pros and cons of each category of consumption tax and see how they affect our day to day lives. 

Sales Tax

Most notably levied in the United States and only a handful of other nations, sales tax is applied at the point of sale of retail goods. In the US, sales taxes are levied on the state and local levels ranging from 0% in states like Delaware and Oregon up to a maximum of 11.45% in Louisiana according to the Tax foundation. In short, it is a variable surcharge on most things you buy depending on the jurisdiction you’re in. This is because sales taxes like all consumption taxes are indirect, meaning that retailers can pass on the cost of the tax to the consumer. The saving grace to all this is that in most states, essentials such as groceries and prescription medicine are exempt from sales tax. Without exemptions, sales tax would be very regressive, because lower income households must spend a greater proportion of their income on essentials. To illustrate this, an extra dollar for a person with ten dollars is much more significant than an extra dollar for someone with a thousand dollars. Therefore, increases in prices due to sales tax hits lower income households much harder. The exemptions on essentials helps make sales tax more progressive but is limited in effectiveness and has some drawbacks. As more and more things get exempted, more definitions need to be written into law to differentiate taxable and non-taxable goods and services. This requires businesses to dance around legal definitions and invites evasion and exploitation of loopholes. Furthermore, the exemptions for “essential” items are defined by the government, which risks blind spots where goods that are considered essential by some suffer from increased prices due to unfair exemptions. Overall, sales taxes increase prices for all goods the tax is applied to. In the modern day where cost of living is a great concern for many, an additional surcharge on the price of most goods is never welcome. 

Value added tax (VAT)

VAT is the bigger and meaner brother of the sales tax commonly levied outside of America. It is also known as the Goods and Services tax (GST) in commonwealth countries as it is a tax on all goods and all services at every level of the supply chain. Therefore, VAT is much more regressive than sales taxes.

Similar to sales tax, governments that employ VAT also implement a slew of exemptions to reduce its impact on everyone. Since every step of the supply chain involve many goods and services exchanges, VAT on those intermediate processes risks exponential inflation of prices for consumers. Therefore, business expenses are often exempt from VAT, which is good. However, this introduces an unnecessary amount of tax paperwork most businesses have to file and makes VAT a much more complicated tax to collect. 

Consequently, VAT suffers from the same problem of loopholes and some products being considered non-essential when they are essential for some, making the cost of living much higher for everyday people. Essential goods and services aside, VAT is a tax on most goods and services consumed, increasing the price of most things we enjoy.

Excise taxes

Usually applied to specific goods or services, excise taxes are designed to discourage the consumption of certain things, through the same indirectness inherent to all consumption taxes. The targets of excise taxes are usually goods and activities that are considered harmful to individuals or society at large; examples include: cigarettes and gambling services. The goal is to reduce the cost to society produced by the manufacture or consumption of the targeted goods/services. These are generally good things, but the laws can be somewhat arbitrary when it comes to setting thresholds and rates for things like luxury goods and loopholes can be exploited by those who can afford to find them. The hard part of setting these taxes is in calculating the monetary cost to society. This is critical for goods that are essential for other products; take fuel for example, if the excise on fuel is too low, then more emissions may be produced; if the fuel excise is too high, then millions of commuters, supply chains and production processes may be affected by higher prices, resulting in further adverse downstream effects.

In conclusion, consumption taxes are regressive by nature, and measures taken to make them less regressive are often not enough. Furthermore, setting the tax rate and the legal definitions around taxable and exempt items can be finicky and filled with loopholes to be exploited by the rich who can afford to hire tax attorneys and accountants. At the end of the day consumption taxes generally result in an increase in price of most goods which impact the middle and lower classes the most.

For our second episode in this saga, we’ll be covering a peculiar tax that has gotten ever more attention, especially with the rise of the Trump administration: tariffs.