Those who advocate a consumption tax to replace income taxes make several points that seem appealing to the average taxpayer. Rather than paying a tax on earnings, people would only be required to pay taxes on goods and services that they consume. This seems like a good idea on the surface, especially since it would level the playing field in regard to tax evaders. Those who make money through illegal means or who are paid under the table, would no longer have a tax advantage. They too would have to pay sales taxes each time they purchased goods or services, which may well be the biggest advantage of instituting this type of tax.
Another perceived advantage to implementing a consumption tax rather than a tax on earnings is that it does not tax savings; it only applies to monies spent. This sounds good too, until one considers the economic dilemma that will likely be created when people save more of their money instead of spending and putting it back into the economy. It would likely be more difficult for the government get enough money when people save more of their cash in order to lessen the amount of taxes they are paying. The rate of taxation may have to be raised to make up the difference.
As with anything else, there are pros and cons to all aspects of a consumption tax. One might claim that such taxes are not forced to be paid in the way that income taxes are. This is true, but the same or perhaps an even greater rate of taxation will be required if consumers intend to continue enjoying the lifestyle to which they have become accustomed. Again, the government is going to get its revenue.
Under such a tax system, a potential disadvantage is that some consumer goods or services could be taxed at a higher rate than others, based on arbitrary rules such as one item being seen as a luxury or by way of a “sin tax.” Alcohol, for example, could be taxed at an exorbitant rate to discourage purchasing it. Such use could be abused even further, and used politically to undermine a particular industry or company. Businesses cannot simply soak up higher costs or pass the burden to the consumer without overpricing their goods, and if their products are taxed at a rate far higher than that of other companies, they won’t be able to compete. The cost of materials will be also be taxed at a higher rate, causing manufacturing costs to go up.
While a consumption tax would seem a more fair method of taxation in an ideal world, the world isn't ideal. Overall, it could prove to be the better system if abuse could be controlled. On the other hand, there are those who express a desire to reduce taxes — and therefore government — across the board, rather than simply changing methods from tax on earnings to consumption.
