Introduction
A consumption tax is a duty on goods and services spent by a household. It can be of direct forms like sales and value-added taxes or indirect forms like expenditure taxes.
Frank consumption tax suggestion involves taxpayers summing up their total incomes on a return form and only Frank would offer saving exemptions from this taxable income thus leaving consumption as the taxation base. It also considers a large standard deduction thus cutting on nonluxury rents and foods (Frank, 2011).
Strengths of progressive consumption tax
First, it instills a savings culture in residents as they are mandated to open accounts for tax-exempt earnings. This discourages excessive consumption. In addition, consumption tax encourages the capital formation and work thereby increasing economic growth.
Third, consumption taxes have a wider base, easier to implement as all consumption levels are taxed and it is considered a major revenue source for government and local authorities.
Fourth, consumption taxes do not alter spending tradition, behavior patterns, and scarce resource allocation. It is based on the assumption that consumption is already taxed and so it does not matter which product is consumed.
Fifth, consumption taxes increases productivity, capital stock, and the size of the economy which is directly related to its treatment of depreciation (Frank, 2011).
Sixth, progressive consumption tax minimizes inequality in consumption spending. It also has an inverse implication on wealth inequality as the rich could take advantage of this savings exemption.
Seventh, progressive consumption tax reduces the financial pressure on middle-level workers. These workers usually spend beyond their means to equate with their expensive neighborhoods.
Finally, tax incentives may result in economic recession due to a reduction in consumption levels. However, residents would only profit from a provisional consumption tax cut if they spend immediately (Economic policy reforms: Going for growth, 2012).
Weaknesses of progressive consumption tax
First, the higher marginal tax rates dampen productive economic activities. For instance, a 100% marginal tax rate means that hard-working taxpayers are taxed more than lazy ones thus demoralizing workers lowering consumption (Frank, 2011).
Secondly, consumption and sales taxes shift the tax burden to low-income groups. However, the ratio of tax commitment reduces as wealth increases, and citizens who consume all their earnings are taxed at 100 percent while savers and investors are taxed at a remaining balance (Cockfield, 2008; Frank, 2011).
Third, consumption is directly proportional to long-run average income levels. Therefore any abrupt changes in the household income levels within a given year result in payment of higher income. Changes in annual income may originate from the sale of fixed assets like homes, annual bonuses (Frank, 2011).
Fourth, this tax has many exemptions and loopholes which hinder its efficient operations. All savings are tax-exempt thereby contrasting income tax which covers salaries, wages, and income irrespective of its usage (Bird and smart, n.d).
Fifth, a higher and consistent revenue gain requires a higher taxation high taxation rate. But this high rate usually discourages individual investment and savings. Finally, the consumption rates start at a lower level and steeply rise. This usually endangers middle-income earners while low-income earners are tax-exempt although they receive major government benefits.
References
Bird, R. and Smart, M. (n.d.). Tax policy and tax research in Canada. Web.
Cockfield, A. J. (2008). Examining policy options for the taxation of outbound direct investment. Web.
Economic policy reforms: Going for growth. (2012). Web.
Frank, R. (2011). The Darwin Economy: Liberty, Competition, and the Common Good. Princeton University Press. Print.