How a Consumption Tax Creates Fairness

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Americans celebrate the anniversary of the Declaration of Independence on July 4. On this day in 1776, colonial Americans, tired of “taxation without representation,” officially said enough is enough to unfair taxes. Years later, however, there is still discontent among citizens about our tax responsibilities.

A consumption tax is one way to add more fairness to the current tax system. While our tax code is supposed to be progressive, it’s possible for people to avoid paying taxes by having the resources to hire tax accountants and attorneys who find loopholes. This sometimes means the middle class pays a higher percentage of income tax than the very rich. Replacing the income tax with consumption tax could level the playing field so that all Americans pay the same rate based on what they choose to spend or save.

Americans Don’t Believe There Is Fairness in Taxation

Taxes are necessary to maintain a functional civilization. Americans understand that government revenue supports community services, and they are generally willing to pay their fair share. However, results from an April 2015 Gallup poll reveal that almost half of Americans believe that lower- and middle-income workers pay too much in taxes. It’s easy to see why the federal government has lost credibility with average citizens.

A study the Pew Research Center released in March 2015 found that 60 percent of Americans believe corporations and wealthy individuals don’t pay their fair share of taxes. In the 1950s, corporate taxes made up 25 to 30 percent of federal revenues. In 2015, corporations are projected to fund only 11 percent of government costs, while payroll and income tax receipts are expected to account for 81 percent.

Citizens from all income brackets agree that there is a lack of fairness in taxation. Lower- to-middle-income workers are bothered by the feeling that many people don’t pay their fair share, according to a December 2011 report from the Pew Research Center, while higher-wage earners cite the U.S. tax system’s complexity as their biggest complaint. Pew Research also found that almost 60 percent of Americans think there is so much wrong with the tax code that Congress should completely change it.

A Consumption Tax Evens Things Out

Several economists have proposed a consumption tax, which would level the playing field by making tax rates equal for all Americans. Without income or capital gains taxes, workers would get to keep more money in their paychecks; investors and businesses would be able to grow their income and not worry about double taxation. A progressive system, in which necessities such as groceries and health care are taxed at lower rates and luxuries are taxed at a premium, would prevent the consumption tax from disproportionately affecting low-income Americans, who tend to spend a larger portion of their incomes on necessities.

A tax on consumption would also reward the practice of saving. This could help modify behavior over time so that more Americans are able to retire at traditional retirement age instead of working long after. This tax would also increase the tax base by ending unfairness stemming from those who work “under the table” and avoid paying income tax.

Remembering What America Stands for on Independence Day

This Fourth of July, it’s important to remember why our nation was founded: in response to oppression and unfair tax policies. Our current tax system has evolved into a complicated monolith of unfair statutes that benefit those who can afford to find loopholes while penalizing those who work the hardest to get by. It might be time for an overhaul of the entire system with a more equal consumption tax as its foundation.

Kim Parr is a private practice optometrist by day and financial writer/blogger by night. She lives in Southwest Colorado with her husband and daughter who all share a love of travel, the outdoors, and finding ways to earn passive income to retire early. Her writing has been featured on Business Insider, Life Hacker,  Mint, and