Utility Theory
Utility refers to the satisfaction that a consumer gets from consuming a particular product or service. Thus, utility theory relates to the evaluation of customer choices and decisions that affect customer behavior and the demand for specific commodities based on the relevant factors at hand. These factors include customer preferences, taste, and cost of the product and income of the individuals. This paper analyzes customer behavior in regards to the tax systems. It looks into the different effects of a high sales tax that has a tax-exempt and a lower sales tax with no tax exemption on food consumption. Additionally, the paper analyzes if the effects on consumptions differ differently for high-income earners and low-income families.
Tax reduces the purchasing power of an individual and reduces the amount of money they hold to consume a product. Generally, Tax-payers are characterized as being risk-averse, where they intend to buy more for less. Therefore an increase in the sales tax will reduce the consumption of products and vice versa. Thus, providing exemptions on tax rates of certain commodities has a moderate effect. Previous research has shown that exempting food from sales tax provides a sustainable and proportional tax rate that is more lenient. Tax exemptions offer a basis for more households to consume more on what would have otherwise been seen as a regressive levy on the same.
In Washington, the government has imposed a tax of 8% that exempt food product. The exemption on food brings an effective rate that is lower for every income class and also significantly less regressive. The immediate effect on family consumption is that more people buy more food commodities once they are cheaper and have a better affordable price as compared to other products. On the other hand, in Idaho, the economy has a tax rate of 5% that also includes food. However, the first 200 dollars on food consumption is refunded, which means that the consumers get a tax-exempt on the first 4000 dollars that a family spends. In return, the effect of this tax rate is that consumers spend much more until when the limit of the tax-exempt. As the limit is reached, consumers tend to be more cautious about their spending and tend to spend much less since the food is much more expensive.
Additionally, these tax rates have a different effect on people depending on their economic status. First, food exemptions offer more benefits to families that earn a very high income, since generally, and they spend more on food expenditure as opposed to low income earning families. Moreover, the tax systems do not have a significant difference in high-income families as the families’ spending is based on what they want to spend and necessarily not the amount to pay for the consumption of the products. On the other hand, income is a significant deal for low income earning families, and therefore they are in look for avenues where they can spend less. Thus, these families will consume more on food commodities in Washington, where a tax-exempt exists. Moreover, in Idaho, the families will consume more until the limit of and a food exemption is reached and then regulate their consumption afterward.
In conclusion, utility theory addresses how consumers make consumption decisions based on their preference, income, and cost of the products.it is evident that tax-systems play a significant role in consumer behaviors as it directly or indirectly affects the purchasing power of an individual. Additionally, it is also clear that the effect of tax systems differs in the economic classes of an individual.