Is consumption a reliable basis for tax revenue?
Yes, in fact, consumption is a more stable basis for tax revenue than income. Many economic studies conclude that revenue raised by sales taxes are less variable than the income tax revenue. During our current economic downturn, sales taxes revenues have decreased much less than income and most business tax revenue. Why? Because during difficult times due to loss of a job or an inability to work, people may not have as much income, or may have no income at all. They borrow funds, use savings, collect unemployment or welfare, etc. They may not have normal earnings, but they continue to consume. The chart below shows the yearly changes during the past thirty-two years in state revenue derived from the Michigan income tax and sales tax. It clearly shows that sales taxes are a relatively more stable revenue source to fund our state government.
