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In Theory

As its name indicates, consumption taxation targets our consumption levels. In other words, the more we buy, the more we pay in taxes. What can be fairer?

There are many types of such taxes, the most important are:

  • Sales Tax: this tax is applied at the point of sale. Who is taxed and how the tax is applied vary significantly from country to country. In some places every time a sale is made throughout the entire manufacturing chain, tax is collected. In some other places, it is mainly collected at a retail level.
  • Value Added Tax: this is tax applied only to the additional value that each manufacturing step adds to a good or service. Each seller of a product charges tax to the next buyer in the supply chain. From this collected money, the seller subtracts the taxes he had to pay for his supplies and remits the rest to the government. The end result is that the final customer pays taxes only on the extra value that the entire supply chain added to the product.

The fairness of these taxes has been evaluated by international organizations such as the OECD who found it to be the least harmful of all taxes when it comes to economic growth. Therefore, they must be fair and just.

Consumption Taxation


In Reality

These types of taxes are hailed by governments because it is a way for them to extract even more money from people without increasing the perception of tax increases. As long as people do not connect tax increases with a specific politician, this politician can extract more money to buy more votes without any downside. Consumption taxes are such taxes. They are typically brought in for very specific purposes at very low taxation levels. Eventually, over time, they “mysteriously” increase and broaden their reach. They are a type of stealth tax.

Organizations such as the OECD, which was primarily a statistical organization, are used by governments as spearheads to promote the “benefits” of taxation. They are also using such organizations as “sticks” to punish “non-compliant” countries by inflicting international pressure on them. What the term “non-compliance” means in reality is nothing more than tax competition. Governments are not interested in competition, much less tax competition. Governments want cartels that will inflict and maintain high taxes on all their citizens. As such, these organizations support all kinds of taxes, but, once in a while, they make mistakes. If you take a look at the attached OECD report, you will notice that even they recognize that consumption taxes:

  • Are “neutral” to savings. The word “neutral” meaning they don’t affect saving habits. Of course, they conveniently forget to mention that they do affect savings since as people are forced to spend more they have less to save! Less savings means less economic activity which means lower standards of living. Strange… this omission must have been a slip-up…
  • Have negative impacts on employment. Really? So the less people consume, the less gets manufactured and the less employment becomes available. Wow! What a revelation!
  • They can “encourage” work by taxing luxury or leisure goods heavily and lowering taxes on “good” gods and services such as child care. In other words, consumption taxes are ok because they allow for governments to impose on us their view of their politically correct morality. We are only drones who are on this earth to support governments with our taxes. This is obvious because “good” work is only good for as long as it serves “society”. Please, correct us if we are wrong, but didn’t the USSR tried this before?
  • Can “yield environmental benefits” by penalizing “bad” behaviors such as the use of petrol or diesel or tobacco and alcohol. Again, the market is already optimized to minimize the use of resources. There is no need for taxes to increase inefficiency or curtail our freedoms. But, according to the OECD, these seem to be lofty goals!
  • Are inefficient to reduce “income inequality” because if basic goods are exempt from consumption taxes then rich people will use more of them and benefit more! They recommend taxing everything and then give money directly to low income families. This would be more “efficient”. Yes, this make sense. Remove productive capital from the economy hence ensuring lower standards of living, while at the same time “gift” money to people to discourage getting jobs and become even more dependent from the government. Yes, this really make sense….
  • Does not solve issues with “underground economies” because people will simply hide that revenue. Some governments have lowered consumption taxes on goods and services prone to underground economies… but then more people shifted to them. The whole concept is retarded. The so-called “underground economies” are actually free markets. Taxed economies are true “black markets” simply because most people transact in the dark and so it is blind to the government robbing them.
  • They are not “progressive” and may even be “regressive”. We have seen in the previous section (Regressive Taxation) how do they work. It suffices to say that consumption taxes are high, therefore there is no benefit here for anybody.

We could actually keep going, on this type of taxes, but thanks to the OECD, we have covered enough ground to demonstrate the consequences of consumption taxation and the picture is not pretty at all.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Taxes And Myths - Part 6


Download this file (Tax and Economic Growth.pdf)Tax and Economic Growth.pdf[OECD Tax and Economic Growth]849 kB
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