Study: Consumers Would Not Give National Sales Tax a Chilly Reception

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Terry Sheridan
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Amid ongoing debate about the benefits of a possible national sales tax, what could 208 New Englanders in a mock refrigerator-buying exercise have to contribute to the discussion?

Plenty, as it turns out. The experiment provided evidence that consumers may not find a so-called “consumption tax” as onerous as some may think. In fact, they may not even pay attention to it, according to a new study, “Cognitive Responses to Partitioned Pricing of Consumption Taxes: Consequences for State and Local Tax Revenues,” published in the spring issue of the Journal of the American Taxation Association, a publication of the American Accounting Association.

The national sales tax issue turns on an overhaul of the income tax, maybe even repealing it entirely. Instead of a tax on income, a consumption system would tax purchases. It’s a tactic believed to boost economic growth, and it’s commonly used in other countries.

The study, authored by Cynthia Blanthorne of the University of Rhode Island and Michael L. Roberts of the University of Colorado at Denver, notes that such a tax could cut consumer debt and boost savings and investments. But increasing consumption taxes might reduce spending, which would hinder economic growth and increase unemployment.

According to a Wall Street Journalarticle in late March, several legislators are considering ways to overhaul the US tax system, and developing a consumption tax is among the proposals.

So, back to the refrigerator study.

The idea of the experiment was to see how these “buyers” would respond to a tax added to their $740 refrigerator purchase price, either as a dollar or percentage amount, compared to an all-inclusive price.

Researchers found that respondents remember a lower purchase price when the purchase shows the base price and a percentage sales tax. And they were likely to ignore the tax entirely when it’s indicated as a percentage.

The bottom line? There was increased consumer demand when consumption taxes were depicted as add-on sales taxes rather than all-inclusive excise taxes, researchers found. There also was increased demand when taxes were added as a percentage rather than a dollar amount.

“These results should encourage policymakers to reconsider the drag on the economy caused by the imposition of federal excise taxes,” the researchers wrote. “At state and local levels, our findings suggest ways to change the ‘product mix’ of sales versus excise taxes to maximize consumption tax revenues.”

As legislative consideration evolves, the researchers believe their findings “are relevant to discussions about adding a national consumption tax, such as a sales tax or value-added tax, to reduce the federal budget deficit.”

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By Kip Dodson
Jun 26th 2015 01:12

The FAIRtax plan deletes ALL income taxes ( corporate, payroll, capitals gains, personal and business) and the IRS entirely, which raises lower and middle income family's take-home pay more than ever in history (about 10%) and the FAIRtax plan by law simultaneously deletes the hidden taxes within the current retail prices of goods, therefore dropping the cost of good by about 25-30%. People keep more INCOME (>10%) and pay less for goods. I see plenty of reasons all Americans are warm to the FAIRtax. The leading one, never fear the IRS again and transfer tax collection away from 140 million people to about 20 million retail businesses. Goodbye April 15th and the form 1040. Get your politician "all-in!" On the FAIRTax!

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By David Boone
Jun 26th 2015 01:12

As a FairTaxer, I find this study intriguing. We have our own terminology in the movement. For example the FairTax is figured as an inclusive tax which means that it is part of the sticker price. State and local sales taxes are figured as exclusive taxes, meaning the tax is added to the retail price. At the end of the day it is all the same, coming down to a matter of semantics. As I read the article, the participants were not particularly concerned with the tax rate when it was expressed as exclusive. This would be great news for us if that conclusion holds up.

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By Allen Dale Avenson
Jun 26th 2015 01:12

I cannot imagine any government needing more than the 23% proposed consumption tax. Any additional tax would need a sunset clause to prevent it from being confiscatory after a significant reduction in the national debt has been achieved. I believe our national profligacy should only require a 12% consumption tax with lower rates above 5% for very basic essential products, e.g. fresh fruits and vegetables. We must learn to live within our means. Everybody needs to appropriately support all levels of government. To preserve our freedoms, all other support must be voluntary! To create exemptions via undue influence, lobby, and executive order, is grand larceny. To support armies of tax preparers, tax attorneys, financial planners, some who spend more time avoiding taxes than proper planning, and tax collectors (IRS), is stupid, and a severe drag on the American economy! I completely agree with the concept of a fair tax, Only a fair tax, for the federal government.

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