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.”
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.