One of the ways that cities, counties, and states raise revenue is through sales tax. Sales tax is charged on items that consumers buy. In some areas, sales tax is only charged on non-food items, while other areas charge a lower tax on food items — or exempt non-packaged foods from sales tax altogether.
However it works, though, the revenue raised can be valuable. However, it’s not a matter of just raising the sales tax whenever you need an economic boost. Japan recently hoped to boost its fiscal position by increasing its national consumption tax, but the play, so far, hasn’t panned out quite as much as hoped, according to CNN Money.
Many modern first-world economies rely on consumption to keep them going. So, from an economic growth standpoint, it can be problematic if people stop buying items — especially big-ticket items — in order to avoid the higher tax. In Japan, the sales tax increase took place in April, and many consumers rushed to buy big-ticket items before the increase went into effect.
Now, though, the latest numbers show that economic growth has slowed. Reports are that some of the shopping, especially for big-ticket items, has tapered off now that consumers have higher taxes on their purchases.
Without the right balance, it’s possible for a sales tax to be too high, and discourage people from spending money. This can also, in turn, hurt revenues to some degree, depending on how drastic the change in consumer behavior is. It’s similar to the way that some hotels offer low prices to offset the pain of high local room taxes or the resort fees charged. (Or they offer the low rates to get you to the hotel and then you are caught off guard by the other costs.)
Would a National Sales Tax Work in the United States?
One of the suggestions that occasionally gets floated out there is the idea of a national sales tax to raise revenue in the United States. However, implementing it might be difficult. In states that don’t charge sales tax, a national sales tax would add a new tax to the docket. For other localities that are already subject to sales tax, adding a national component would boost the current rate. Even a relatively low tax, perhaps one percent, could be painful in a locality that has a 9.45 rate already. Pushing that up even higher might be devastating to some household budgets.
Another issue, though, is that a national sales tax isn’t all that popular. Some might get behind it if the federal income tax were abolished — or at least greatly reduced. However, if the federal income tax situation remains as-is, it would be difficult to convince Americans to get on board with a national sales tax. The idea of taxing you only on your level of consumption, rather than on your income, is tempting to some, but it’s a hard sell in some other cases, especially if such a national tax didn’t include an exemption for life necessities, like food.
It’s an interesting thought, but it’s also something that needs to be approached with care since Japan offers a little insight into how some might respond if they suddenly had to pay a higher tax on items. It might not help revenue in the long run.