Sales Taxes and the Propensity to Consume

Abstract

There has been much discussion concerning the necessity for the attainment of full, or at least high, employment in the postwar period. In order to maintain this employment it has been emphasized that consumer demand, due to such factors as the increased efficiency of industry, must be kept at higher levels than we have experienced heretofore in the United States: According to a recent study made by the Twentieth Century Fund, the war has probably advanced American industry ten or fifteen years in one year in terms of new products and processes and in terms of improvements in the old.' The idea of government intervention in bringing about desired levels of consumption is not new. Before the war Keynes recommended that the government exercise a guiding influence upon the propensity to consume.2 One of the methods now often suggested for bringing about this necessary increased consumption after the war has been the repeal of state sales taxes. Since they do not tax savings, sales taxes are a greater burden upon the classes that normally do most of the consuming. Repeal of the sales taxes should increase the purchases of these middle and lower income classes. It is not the purpose of this article to defend the sales tax. From the standpoint of equity, the sales tax is a very poor tax. The purpose of this article, however, is to consider the limitations inherent in the use of sales-tax manipulations in effectively controlling the level of consumption. Does the propensity to consume always increase when a sales tax is repealed? Conversely, does the propensity to consume always decrease when a sales tax is imposed? These questions will be considered with regard to four factors, namely, 1) the incidence of the sales tax, 2) the stage of the business cycle in the period of levy, 3) the rates and base of the sales tax levied, and 4) the use of the proceeds of the sales tax.