The Economy

National Sales Tax Wouldn’t Depress Consumer Spending: Study

When a tax on consumption is a "distinct percentage add-on," U.S. consumers tend to pay little attention, say researchers.
Matthew HellerApril 13, 2015
National Sales Tax Wouldn’t Depress Consumer Spending: Study

In a study that may have implications for the debate over a possible national sales tax, researchers have found that close to one-third of consumers pay little or no attention to sales taxes expressed as a percentage in making spending decisions.

Critics of a national sales tax are concerned that it would depress consumer spending. But a new study published by the Journal of the American Taxation Association suggests that such a tax might actually have a contrary effect.

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shoppingbagResearchers from the University of Rhode Island and the University of Colorado at Denver said consumers who were presented with a hypothetical selection of add-ons to the price of a refrigerator were more likely to compute the total price mathematically if the sales tax was expressed as a dollar amount rather than as a percentage of the base price.

And on the whole, the study says, consumers find sales taxes less burdensome than other price add-ons such as service warranties or shipping charges that they encounter in their daily lives.

“Given our study’s finding that sales taxes expressed in percentages have relatively little effect on people’s purchase decisions, a national consumption tax could conceivably increase consumer spending if counterbalanced by tax reductions that would enable people to keep more money from their jobs,” co-author Cynthia Blanthorne said in a news release.

As The Wall Street Journal reported last month, “U.S. lawmakers on both sides of the aisle increasingly are finding appeal in an ambitious concept for overhauling the nation’s income-tax system: a tax based on consumption, a tool long used around the world.” In Europe, such taxes commonly take the form of value-added taxes, or VATs.

But Blanthorne said her study suggests that if a U.S. tax was folded into the price of products, as VATs are, “it would likely have more of a dampening effect than if it was a distinct percentage add-on, as is typically the case with state and local sales taxes.”

The results “should encourage policy-makers to reconsider the drag on the economy caused by the imposition of excise taxes,” the authors say.

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