Unit 6 Consumption Tax: The Government Is Always Looking For

Unit 6 Consumption Tax The government is always looking for new sources of revenue

The government consistently seeks new revenue streams to fund public services and infrastructure. One approach involves implementing consumption taxes on goods and services, such as coffee. This paper explores whether such a tax should be levied on the seller, like Starbucks, or directly on the consumer. Additionally, it discusses the appropriate type of fund where the revenue should be reported. The analysis considers economic impacts, fairness, administrative feasibility, and fiscal policy implications.

When considering a consumption tax on coffee, the decision to tax the seller or the consumer hinges on several factors, including tax incidence, administrative ease, and equity. Taxing the seller, such as Starbucks, involves imposing a tax on the business based on the sale of coffee products. Conversely, taxing the consumer involves levying a specific amount at the point of purchase, effectively making the consumer bear the tax burden.

Taxing the seller simplifies collection and enforcement, as businesses regularly report sales and remit taxes accordingly. This approach is common with sales taxes and value-added taxes (VAT). However, the actual economic burden often falls on the consumer, who bears the higher prices resulting from the tax. If Starbucks is taxed, the company may pass on the cost to customers through increased prices, effectively transferring the tax incidence to consumers. Conversely, directly taxing consumers at the point of purchase ensures the tax burden is visible and immediate to the individual, potentially influencing purchasing behavior more effectively.

From a policy perspective, taxing the consumer might be preferable for targeted revenue and behavioral modification. For example, taxing coffee heavily could discourage excessive consumption, which aligns with public health initiatives. Moreover, consumers tend to bear the economic burden of consumption taxes, making direct taxation more transparent in policy outcomes. In contrast, taxing the seller can complicate compliance if businesses attempt to shift the tax burden onto consumers or absorb it to remain competitive.

Regarding the fund for revenue reporting, the income generated from the consumption tax should ideally be directed to a dedicated public health or transportation fund. These sectors often benefit directly from revenue generated through consumption taxes, especially on items like coffee, which have health and economic implications. Allocating the revenue to such funds enhances transparency and accountability, ensuring that the taxation supports relevant public initiatives and demonstrates fiscal responsibility.

Implementing a consumption tax on coffee requires careful consideration of economic impacts and social equity. Such taxes may disproportionately affect lower-income populations who spend a larger share of their income on goods like coffee. To mitigate this, policymakers could introduce exemption thresholds or offset measures. Ultimately, a well-designed consumption tax can serve as a stable revenue source while promoting public health and economic goals.

References

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• World Health Organization. (2019). Fiscal Policies for Health: Taxation on Unhealthy Products. WHO Publications.