Consumption tax versus sales tax

Date posted: February 20, 2013

In the discussion about tax reform in North Carolina, two terms – consumption tax and sales tax – are being mentioned. Are they the same? N.C. State University economist Mike Walden answers.

“Well, they both try to get at taxing what we spend rather than our incomes. But they are slightly different, and they’re implemented in a different way. For example, obviously (with) a sales tax – which people in North Carolina are very familiar with – when you buy something that is subject to the sales tax, you pay that tax at the point of purchase and then you go on your way. And, of course, one of the debates about the sales tax right now in North Carolina (is) should … the state broaden what is subject to that sales tax.

“The consumption tax, although it tries to get at spending, does it in a slightly different way. It would be operated through the existing income tax system. Essentially what would happen here is you would file your income taxes just like you do now. You would report your income. You would subtract from that, however, monies from your income that you’ve invested, whether it be in the stock market or bonds or whatever. And then you would be taxed on the difference, which presumably gets at what you’re spending – that is, what your consumption is.

“Now what you could do there, obviously, you could have different rates for different levels of income.  You could still have some deductions, et cetera.

“Another big advantage of the consumption tax is it would get at taxing spending done online, which is not now captured by the sales tax. One big issue with the consumption tax, however, is, what counts as an investment?

“So, these are two different ideas, different ways of implementing an idea that they’re trying to get at – the same economic value that is spinning, but do so in an entirely different methods.”

 

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