A consumption tax is charged on spending on goods and services. This lesson introduces the tax base and distinguishes the main forms of consumption tax.
A consumption tax is a tax levied on spending to consume goods and services. Its tax base is the money spent on that consumption, rather than all income earned. Consumption taxes are usually indirect: a business collects the tax from a buyer and passes it to a government. A personal expenditure tax is a direct form of consumption taxation.
All flashcards
What is a consumption tax?
A tax levied on spending on goods and services. Its tax base is money spent on consumption.
What does ad valorem mean for a sales tax?
The tax is calculated as a percentage of the sale price, so the amount varies with the price of the purchase.
How does VAT tax value added?
It applies to value added to a product at stages of manufacture or distribution. A common system accounts for tax paid on business inputs.
What is an excise tax?
A tax that targets a specific class of goods, such as alcohol, tobacco, or gasoline.
What is an expenditure tax?
A direct personal consumption tax that focuses on spending rather than saving, often by deducting savings and investments from income.
Quiz questions
How do many value-added tax systems account for tax paid by businesses on inputs?Answer: They credit input taxes against tax collected on sales.
Why can a flat consumption tax be regressive when compared with annual income?Answer: Higher-income people often consume a smaller share of their income.
According to Alexander Hamilton's argument, why might excessively high duties raise less revenue than moderate duties?Answer: They can shrink consumption and encourage evasion.
What does imputed rental value refer to for a homeowner?Answer: The rent the owner could receive by renting out the home.
How can the substitution effect of a consumption tax affect work decisions?Answer: It can make leisure relatively more attractive and reduce work.
Based on the Wikipedia article Consumption tax, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.