Here's a numerical example to illustrate the equivalence of a wage tax and a consumption tax. All of the numbers are for illustration only; if you plug in different numbers, you'll still reach the same conclusion. Assume you earn $10, which you can use to purchase apples at a dollar apiece. Alternatively, you can save part of your $10 at a 50% interest rate and use it to buy apples next year. The Effect of a Wage Tax Now suppose you are subject to a 20% wage tax. This leaves you $8 in take-home pay. With this $8, you have three choices: You can buy 8 apples today. You can save your $8, earn $4 interest, and buy 12 apples next year. You can split your $8 any way you like between current and future apples, which gives you some combination of the above two alternatives. The Effect of a Consumption Tax Suppose instead that you are subject to a 25% consumption tax. The wage tax is gone, so you have $10 in takehome pay. Apples, however, now cost you $1.25 (including tax). Given this, you have three choices: You can buy 8 apples today. You can save your $10, earn $5 interest, and buy 12 apples next year. You can split your $10 any way you like between current and future apples, which gives you some combination of the above two alternatives. The Bottom Line: Both taxes give you exactly the same menu of alternatives---8 apples today, 12 tomorrow, or some combination thereof. Since the menus are identical, you'll make the same choice in either case. (That is, you'll pick your favorite item off the menu either way.) Since you'll make the same choice in either case, the government collects the same amount in either case, and you are equally happy in either case. A 20% wage tax is equivalent to a 25% consumption tax.