Consumption Tax

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DEFINITION of 'Consumption Tax'

A tax on the purchase of a good or service. Consumption taxes can take the form of sales taxes, tariffs, excise and other taxes on consumed goods and services. The term can also refer to a taxing system as a whole where people are taxed based on how much they consume rather than how much they add to the economy (income tax).

BREAKING DOWN 'Consumption Tax'

The consumption tax is not a new idea. It was used by the U.S. government for much of our history before being replaced with an income tax. The Bush administration backed a version of this in 2003, although the proposal was defeated. Ideally, a properly designed consumption tax system would reward savers and penalize spenders.

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RELATED FAQS
  1. What is Value-Added Tax (VAT) and who pays it?

    Value-added tax (VAT) is a consumption tax, meaning that it is a tax on the purchase of a product or a service. It is a form ... Read Full Answer >>
  2. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Full Answer >>
  3. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  4. What tax breaks are afforded to a qualifying widow?

    The tax breaks accorded to qualifying widows or widowers include being able to use a tax filing status that allows for a ... Read Full Answer >>
  5. How is income taxed on prorated salary?

    Since yearly income is viewed by the Internal Revenue Service (IRS) as the total amount of income a person has made over ... Read Full Answer >>
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