Essay on Taxing Consumption

Submitted By Ashleyhardy1
Words: 917
Pages: 4
Open Document
Taxing consumption – taxing individuals based upon what they consume not what they earn. This theory can be traced back as far as the seventeenth-century philosopher Thomas Hobbes, who stated “It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.” (754 Gruber)

Consumption is already taxed to some extent through state and local sales and excise taxes as well as some federal excise taxes but compared to the rest of the world, the United States national and subnational governments receive a lower percentage of tax revenue from consumption taxation than in any other OECD nation. The average rate sits at 29.6% while the US has a 14% rate. (754)

Why might consumption make a better tax base?
Improved Efficiency: A single rate sale tax could reduce many of the inefficiencies associated with the current tax system.
One source of inefficiency in our current tax system is the lack of a “level playing field” across investment choices. Through our current tax system, certain types of savings are favored while others are penalized. Real estate is an example of saving that is favored. People can earn a tax exemption of imputed rent on owner-occupied houses and a capital gains exemption on housing. One type of savings that is penalized is equity from a corporation is it is paid out as dividends. These differences in tax burdens can distort savings decisions just like tax wedges can cause people to make inefficient decisions. People who own homes will earn much more back in savings than those in dividend paying corporations. If an individual prefers to save rather than consume, the amount saved should not be taxed no matter what form their savings take. (755)

Fairer Treatment of savers and less distortion to savings decision:
One major complaint about our current tax system is that it penalizes those who save relative to those who spend. The reduced savings could lead to lower productivity for the US economy. For example, consider the following two individuals, Heather and Sara, in a two period economy; Both earn $100 in the first period and nothing in the second. Sara decides to save some of her income so she can consume in both periods, while Heather prefers to consume her entire income in the first period. Each individual is subject to a 50% income tax and the interest rate earned on savings in 10%. Each person pays $50 in income taxes. Heather spends $50 the first period while Sara spends $25.61. By saving $24.39, Sara can earn interest on the money she saves which comes to the amount of $2.44. Since there is a tax on interest earned, Sara pays $1.22 on her interest of $2.44. Because Heather decided to consume her entire income in period one, she only paid $50 in taxes, but since Sara consumed her income in both periods, she ends up paying $51.11 in taxes. In the long run, Sara is penalized for saving. The tax treatment of savings is both horizontally inequitable and inefficient because it may reduce the incentive to save. The outcomes under a consumption tax system would turn out much different. For instance, a consumption tax system that has a tax rate 100% so that for each $1 of consumption you pay $1 in tax. This system doesn’t have any effect over Heather who consumes $50 in the first period and pays $50 in taxes. Sara, on the other hand, will only consume $26.19 in the first period, pay
Show More

Related Documents: Essay on Taxing Consumption

Should We Tax Bad Food Rhetorical Analysis

economic point of view through developing different perspectives that touch on processed foods. Bittman argues that “taxes would reduce consumption of unhealthful foods and generate billions of dollars annually” (Bittman).Taxing bad food is not the best way to resolve the…

Words 1006 - Pages 5

Bad Food By Mark Bittman Analysis

talking about the steps we should take to overcome eating habits that can lead to the causes listen . In today’s society to make a difference everyone should try eating healthy and some ways to do that is by taxing junk food,spending more money on healthier lunches and cooking at home meals. By taxing junk foods people are more likely to go the extra mile to get something healthier and cheaper. Also wasting more money on school lunches will have a better impact on students…

Words 719 - Pages 3

Externalities In Healthcare

Externalities are defined according to the OECD as ‘situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.’ In the context of alcohol, overconsumption can lead to strain on the healthcare system to tend to those who suffer from the effects of alcohol, and the police force, who have to deal with increased crime. Furthermore, every industry sector is affected…

Words 655 - Pages 3

Weed: Cannabis and Marijuana Essay

Kaylin McCarson Dr. Amanda Goldberg WRT 120 2/10/2012 The Consumption of Marijuana For years people have been arguing why marijuana “hemp” should be legal, and how it’s not as bad as alcohol which leaves you lose normal judgment, loss of balance, and in severe cases alcohol poisoning. Well the time for debate has come to an end because hemp has been legalized in the states of Colorado and Washington for recreational use. Not only that but this broud move has brought up the same debate in Oregon…

Words 1037 - Pages 5

A Soldiers Load Essay

soldiers assaulted beaches with 80 rounds plus eight hand grenades. All too much, said Marshall. Based on expenditures within the first day of combat, Marshall indicated the load could be cut in half. And note for effect, Marshall’s ammunition consumption rates match to those mentioned by Whittaker for mounted operation during the Civil War. However, Marshall would certainly argue against the eighty rounds Whittaker suggested as a trooper’s load. Then again, Whittaker wrote at a time when horseflesh…

Words 585 - Pages 3

There Are Positives And Negative Consequences To The Localization Of Cannabis Cultivation Essay

There are positives and negative consequences to the localization of cannabis cultivation. Discuss. Cannabis is the worlds most commonly used drug in the world and has a long traditional history within developing countries. Since the 1980s western societies were unable to import cannabis due to a global clamp down on illicit drugs and started to produce it themselves (Potter, 2010). We will assess the global impact of this and see if this has made a positive or negative consequence on the localisation…

Words 2653 - Pages 11

You Are What You Eat Essay

program or radio station; it is a nationwide problem and should therefore be dealt with by the federal government. People need to understand that obesity isn’t just a fashion faux pas or skin tight clothing repellant, it is a nationwide killer. By taxing high fat and high sugar food and beverages, we would alleviate some of this “killer’s harmful damage” to our country and reduce the obesity rate. We should be allowed to tax high fat and high sugar food and beverages on the same premises we tax…

Words 2400 - Pages 10

Obesity In America

“Higher sugar-sweetened-beverage taxes may encourage consumers to reduce sugar-sweetened-beverage consumption,” the Dietary Guidelines Advisory Committee wrote. If this tax were to succeed, not only would it be unconstitutional in denying us our freedom of choice, but also ineffective. The obesity problem in the U.S. is caused by the 33 percent of people…

Words 678 - Pages 3

Legalize It Essay

for a seventh or eighth of their current price it would make illegal selling pointless and could bring in at least $10 billion in taxes at the current level of use. Economics aside there are a plethora of health benefits that are offered by the consumption of marijuana. Dr. Henry Gonte says he has never experienced anything like it. “Most of them [patients] are using other prescribed narcotics that are supposed to help them manage their pain, but it’s not working. The usual narcotic combinations make…

Words 1123 - Pages 5

Essay on Tobacco Industry Analysis

activities. In a study of the Australian public service, six months after the workplace smoking bans were brought into effect, it was found that moderate smokers reduced their cigarette consumption by an average of six cigarettes a day, and heavy smokers on average reduced by eight. This was a 29 and 27 percent drop in consumption. (Tobacco in Australia: Facts and Issues. 1998.) An environment such as the workplace, or nightclubs with smoking bans, can help reduce the uptake of smoking…

Words 2162 - Pages 9