Tuesday, November 06, 2007

Consumption Tax?

The question was raised on a message board about what sort of tax is fair. Interestingly the majority of people voted for a consumption tax. What is the consumption tax?

Basically it is a tax by the government on the purchase of a good or service. It is based on someone consuming a good or using a service but not a tax on the labor or material of the good or service. In some ways it is identical to a sales tax.

In order for this to be a workable system, taxpayers would still need to be given exemptions and deductions based on number of family members. This to ensure poor people and those with large families do not pay to consume goods. Also all savings would be deductible under a consumption tax system.

Surprisingly a number of people on the message board were in favor of this new tax rate. I was very surprised. Why? Because most of these people were middle class families, with one primary breadwinner, and two children.

Hence their actual federal tax rate after deductions, personal exemptions, child tax credit is less than 5% and many actually got money back from the federal government in form of child tax credit. If this is the case why are these people in favor of a consumption tax? They will pay a ton more in taxes because they definitely consume more than 5% of their incomes.

However, I think they do not even realize how much they consume. Nor how little they pay under the current regressive tax system. I think that these middle class consumers haven't considered the entire repercussions of changing the tax system.

I think more than a consumption tax a better way would be a flat income tax. More about that another day though.

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