Consumption tax refers to levies on goods and services while income tax refers it the income based on income from capital or labor. The consumption tax closely relates to sales tax only that it is not regressive. The shift from income tax to the consumption tax would have various effects on nation's savings.
Since consumption tax is not punitive to the citizens, it tends to encourage spending. As a result, the country would have an increase in the total savings. However, one needs to note that the individual savings are not per se free taxes. Fundamentally, when investors save their wealth for future use, at the point of consumption they would still pay consumption taxes. In fact, since the wealth would have accumulated, so is the case with the total consumption tax payable (Garner, 10). Therefore, the government would still gain enough revenues that would boost its capital reserves. However, if the consumption tax is too high, it would discourage spending and lead to a drastic decrease in total savings.
Since consumption taxes does not reduce the income of the citizens directly, it would allow them to make personal savings from their salaries and wages. If the people have capital, they are likely to invest more. Besides, as the citizen save more, they would venture into innovation that would trigger economic growth. However, the positive effects on investment are maximum if the consumption tax is within acceptable levels by the majority. In the case it is significantly high, there would be reverse effects on the nation’s saving. The high consumption taxes would discourage consumer spending, decrease business revenues, and reduce the total income the country collects.
Works cited
Garner, Alan. Consumption Taxes: Macroeconomic Effects and Policy Issues. The Federal Reserve Bank of Kansas City. N.d. Pdf file. Available at <https://www.kansascityfed.org/publicat/econrev/pdf/2q05garn.pdf>
