Value Added Tax and Consumer Spending: A Graphical Descriptive Analysis

Abstract

The US has been considering introducing a National Consumption Tax federally. This would be in addition to the states' sales taxes. Since a consumption tax would be an added cost to the consumer, it would be expected that there could be some behavioral change by consumers. This paper uses graphs to describe and analyze whether consumers in the UK and Canada altered their behavior when those countries introduced their Value Added Tax (or Goods and Services Tax). Both retail volume and the percentage change from the prior year (on a monthly basis) were used in the graphic depictions. It was found that there was no or little major behavioral change when the new taxes were introduced. However, when the tax rates were changed substantially, consumers did adapt their behavior to take advantage of the changes by engaging in arbitrage behavior. US consumers are likely to act in a similar manner as UK and Canadian consumers.