Choosing Between Income and Consumption Taxes

Unlike a progressive tax, a flat tax or regressive tax could decrease the ability of low-income taxpayers to afford a decent standard of living. The Nordic model shows progressive taxation can coexist with strong economies, though cultural factors and smaller, more homogeneous populations may contribute to acceptance of high tax rates. Many high earners continue working hard despite high tax rates, suggesting other motivations matter too—career advancement, professional satisfaction, social status. Some studies find small effects on work hours, while others find minimal impact. But the progressivity depends heavily on how “income” gets defined.

For Communities and Public Services

It is likely the value of most existing capital falls at least somewhat, meaning shareholders face a one-time tax burden on their wealth (their existing saving) at the time of transition. The one-time tax on existing wealth would be progressive given that asset ownership is skewed toward the wealthy. In practice, most successful tax systems combine elements of all three approaches. The federal income tax is progressive, but payroll taxes are regressive. States mix income taxes, sales taxes, and property taxes in different combinations.

• The individual income tax system contains some of the U.S.’s largest support programs for families with children, most notably the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC), which encourage work participation and supplement income.
• There are fights over loopholes, etc.  For example, in Florida, food isn’t taxed, unless it’s cooked when purchased.
• You could argue taxes like capital gains and stamp duty are progressive.
• This kind of tax helps lower-income families pay for basics such as shelter, food, and transportation.
• I guess that’s maybe a distinction between savings and consumption rather than investing and consumption, but I sort of thought the difference was irrelevant for tax policy.
• But things are not quite that simple, as when you reframe taxes as a function of consumption, everything looks very different.

That is primarily because lower-income households tend to consume a relatively larger share of their income than higher-income households, while higher-income households save a larger share of their income. Canada levies a federal value-added tax (called the Goods and Services Tax, or GST) at a rate of 5 percent. The GST in Canada replaced an earlier tax called the Manufacturer’s Sales Tax (MST). The significant and varied experience of OECD countries with VATs can inform the debate of adopting a consumption tax in the U.S. The average standard VAT rate in the OECD is 19.3 percent and the OECD average tax base ratio is 54 percent.28 Among OECD countries, some stand out as examples for good VAT policies that have relatively low rates, broad tax bases, and low compliance costs. For example, New Zealand has the broadest tax base covering nearly 100 percent of total consumption.

Value Added Services

Indonesia has implemented progressive vehicular taxes at the municipal level in Cimahi and Palembang,7778 which had a significant impact of the progressive tax system on the local income of the what is the progressive consumption tax municipality. The adjustability of subsidies given to the poor households by the system eliminates the welfare trap issue faced by other proposals (i.e. means-test). The ‘wage subsidy’ is best demonstrated by the gap between ones salary, base pay, and real income post-subsidy. Once the minimal criteria defined by the according government is met, the recipient becomes the payer. The Liberal Democratic Party government of Masayoshi Ōhira attempted to introduce a consumption tax in 1979.

How Regressive Taxes Shape the Economy

Savings and investment are tax-deferred until they become consumption. A value-added tax may exclude certain goods to make it less regressive against income. To the degree that healthcare and K12 are govt funded, you cannot tax them under any system. The proposal you highlight (and simple income tax) “tax” those govt provided services by taxing the rest of the income stream more heavily.

Oregon Measure 118 Is an Aggressive Sales Tax—and Worse

Increased access to these opportunities can help individuals from lower-income backgrounds improve their economic prospects, leading to a more dynamic and inclusive society. Progressive taxation can also act as an automatic stabilizer during economic downturns. As incomes decline, people automatically move into lower tax brackets, reducing their tax burden.

Pitt’s progressive income tax was levied from 1799 to 1802 when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt’s resignation over Catholic emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.

How Taxing Consumption Would Improve Long-Term Opportunity and Well-Being for Families and Children

This seems obvious, but it’s complicated by disagreements about what government should do and how much it should spend. Progressive systems tend to favor you through lower rates and refundable credits like the Earned Income Tax Credit. Many states try to reduce this regressivity by exempting groceries, prescription drugs, or clothing from sales tax. Improvements in the long-run standard of living largely depend on peoples’ willingness to work and to invest in capital.

• So try not to get yourself too worked up about each and every fiscal policy measure and whether, and under what meanings, that measure is progressive or regressive.
• If not then that’s not the valuation Thiel should have been allowed to use.
• These are the people who usually believe the government should spend less money overall and generally oppose government-run social programs that benefit the poor.
• A number of features comprise to account for the overall tax of an economy.

The additional Medicare tax levies an additional 0.9% Medicare hospital tax on income and self-employment profits above these thresholds. Regressive systems can limit public service funding if they discourage economic activity among lower-income residents. Import duties are taxes levied on an importer for goods entering the country.

Often, laws provide for the exemption of certain goods or services from such taxes. ” No new capital is created.”I guess I always viewed the investment/consumption distinction as a distinction, especially in the context of a consumption tax, between “using” something versus “setting it aside”. When I buy a house, I am “setting aside” future use of the house to consume (sort of like prepaying rent for later). When I buy a stock, I’m just parking money (and hoping it grows) for later. I guess that’s maybe a distinction between savings and consumption rather than investing and consumption, but I sort of thought the difference was irrelevant for tax policy.

I put my riskiest investments in the Roth, knowing that the returns are all mine, while in the traditional I take a more balanced and diversified approach. I can see other people doing the opposite, the point is only that I don’t expect the tax regime to be neutral for investment returns. Consumption taxes could actually be made more progressive by increasing the progressivity of income taxation… They’re subtracted from the tax owed rather than from gross income. Some credits are even only available to those living below a certain income level.

The rate of taxation may have to be raised to make up the difference. Texas funds government primarily through sales taxes, property taxes, and business taxes, with no personal income tax. This creates a regressive overall system where lower-income residents pay higher effective rates.

In the United States, home ownership is subsidized by the federal government by permitting limited deductions for mortgage interest expense and capital gains. Therefore, treating renters and homeowners identically under such a consumption tax may not be feasible there. National consumption taxis a tax levied on spending in an economy. The idea is to neutralize the effect of tax on basic products by taxing luxury products more. It taxes individuals who can afford more and gives the benefit to the poor by taxing basic necessity products less. Upon careful observation of the MRP (maximum retail price) of any product, the break up for the taxes can be seen.

Whenever a consumer purchases a product or service in an economy, he/she pays a certain price for the same. Value-added tax, sales tax, customs tax, and GST is included in the bill; these are considered as consumption tax. Consumption tax is the tax levied on spending by the consumer for purchasing products or services.