Which type of tax is known as a consumption tax?

The correct answer is sales tax because it is a type of consumption tax that is levied on the purchase of goods and services. When consumers buy items, a percentage of the sales price is added as tax. This tax is collected by the retailer at the point of sale and then remitted to the government.

Sales tax specifically targets consumer spending, which means it is paid only when individuals consume products or services, aligning it closely with the definition of a consumption tax. Understanding this concept is essential because it reflects a broader category of taxes designed to influence consumer behavior and contribute to government revenue based on spending habits rather than income or ownership.

While excise tax also qualifies as a consumption tax, as it is imposed on specific goods (like gasoline, tobacco, or alcohol) and paid by consumers, sales tax is more universally applicable to everyday purchases, making it a clearer example of a consumption tax in the general context.