It should be carefully noted that the general sales tax is a conspicuous example of
failure to tax consumption. The sales tax is commonly
supposed to penalize consumption, rather than income or capital. Yet we find that the sales tax reduces, not just consumption, but the
incomes of original factors.
The general sales tax is therefore an income tax, albeit a rather haphazard one. Many “right-wing” economists have advocated general sales taxation, as opposed to income taxation, on the grounds that the former taxes consumption but not savings-investment; many “left-wing” economists have opposed sales taxation for the same reason. Both are mistaken; the sales tax is an income tax, though of a more haphazard and uncertain incidence. The major effect of the general sales tax will be that of the income tax—to reduce the consumption
and the saving-investment of the taxpayers. In fact, since, as we have seen, the income tax by its nature falls more heavily on savings-investment than on consumption, we reach the paradoxical and important conclusion that a tax on
consumption will fall more heavily on savings-investment than on consumption in its ultimate incidence.
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