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2009-11-14T23:20:48Z

Created page with '==Definition== A '''consumption tax''' is a tax imposed by a government or regulatory authority on consumption, i.e., on the purchases made for consumption. It could take two fo…'

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==Definition==

A '''consumption tax''' is a tax imposed by a government or regulatory authority on consumption, i.e., on the purchases made for consumption. It could take two forms:

* [[Sales tax]]: A sales tax is a tax imposed on the final purchase, i.e., the purchase by the consumer. It is typically determined as a percentage of the retail price.
* [[Value-added tax]]: This is a tax imposed at each intermediate stage of the production process for the ''value added'' during that stage of the production process. Value-added tax (VAT) is therefore collected at many stages rather than simply at the final point of sale.

==Purposes of a consumption tax==

===Raising revenue===

Consumption taxes are a source of revenue.

===Affecting decision to consume versus save===

Since a consumption tax applies only to that fraction of income that one spends on consumption, it affects people's [[propensity to consume]]. An increase in the consumption tax thus provides an incentive to reduce the propensity to consume, while a decrease in the consumption tax provides an incentive to increase the propensity to consume.

===Affecting decisions of what to consume===

Another purpose of a consumption tax is to shape consumption decisions for individual buyers. A tax levied for this purpose is sometimes called a [[sumptuary tax]]. One rationale for this is to affect people's consumption decisions ''for their own good'', for instance, discouraging people from smoking through higher tobacco taxes.

Another rationale is that of a [[Pigouvian tax]]: a tax intended to raise money to cover the [[external cost]]s imposed by the purchase or use of the good or service.

Consumption tax - Revision history

Vipul: Created page with '==Definition== A '''consumption tax''' is a tax imposed by a government or regulatory authority on consumption, i.e., on the purchases made for consumption. It could take two fo…'