means too much money chasing fewer goods reducing the consumer basket value directly. The indirect impact is that with increased taxation on disposable incomes, the consumers are left with less incomes to spend on hence reducing their spendings versus the previous periods and in return the resultant effect is reduced consumer basket value. In the case where the consumer basket grows with increased prices in the economy, this is attributed to inflation as opposed to consumers increasing their expenditures willingly.
Consumers become deal seekers
Increased taxation on goods and services in the market brings about inflation that is rise in prices of the same products due to increased costs of doing business or due to market shortages caused by uncertainties. Reduced disposable incomes followed by increased prices of goods and services in the economy, reduces the purchasing power of consumers which in turn reduces the basket value of consumers. In pursuit of survival to save a coin in the market, consumers become more of price sensitive as opposed to brand loyalists in the market. The consumers become more of deal loaders in their quest to satisfy their needs and wants in the markets. The consumers would always seek to maximize their utility subject to budget constraints hence they will not mind hoping from one retailer, wholesaler or channel to another in search of better price deals.
Shift from modern trade to general trade
The more the government imposes taxation on consumption, production, distribution and even on disposable income, the more the consumers become particular on where they source their goods and services
in the economy to maximize their utility. Generally, consumers are super bargainers, and they will always be willing to shift in search of deals. The result for this is that the consumption economy tends to lean towards general trade as opposed to modern trade due to tightened measures for compliance in modern trade as opposed to general trade. An economy that seeks to grow and develop into a destination for both foreign and domestic investment partnerships should always work towards increasing the share of their modern trade against general trade. Modern trade is the cornerstone of development, innovations, technological advancements, partnerships, strategies and growth of employment opportunities in the economy.
Reduction of consumer choices in the economy
Increased taxation on raw materials means increased costs of productions in the economy which means unfavorable business environment. This increases the operating costs of doing businesses, reducing operating capital for the same businesses hence reducing their profit margins. In the long run, and because of high costs, most of the production units do not survive in such an economy hence shut down in favor of those who can maneuver their way through. Those who survive the taxation regime scale down their production to cause artificial shortages hence exploiting consumers due to lack of competition and wide range of choices that would have been brought about by the closed production units. Sometimes, scaling down production is not voluntarily to exploit consumers to earn huge margin gains but because of high costs of productions hence firms fail to expand their operations or optimize their production capacities. In the long run, it’ s the consumers who are on the receiving end faced by supply deficit and lack of a wide product range to choose from at affordable prices. Such stringent taxation measures erode the consumers chances to make choices in the market.
Conclusion
It is evident that states’ strategies should be considerate in their decisions when formulating and implementing taxation policies and measures in the economy as this affects the key microeconomic parameters like consumption which has a negative effect on the wellbeing of the consumers. Taxation leads to reduced consumption of goods and services not unless the goods or services in question are necessities. Still, even if they are necessity goods or services, with the law of nature, consumers normally have a way of implementing self-regulatory mechanisms to reduce their spending on products.
The state can impose tough tax measures where they want to restrict consumption say for harmful or imported products and reduce taxation where the products are necessities or locally made to build the economy and protect domestic industrialization. The state should also reconsider taxation policy since it is a factor responsible for the increased cost of living in the economy.
The government needs to protect modern trade sector by reviewing the measures to encourage consumer shift from general trade as this is key towards economic growth, innovations, sustainability and development. In the end, the same way the government cushions itself, its creditors, traders and industries against inflation, it should also cushion consumers in the economy against inflation instead of letting them sweat to pay for it. It seems the only time you will see consumers being cushioned is when there is a pandemic that makes the cost of living become a disaster or for special political gain.
Patrick Maninga is an Economist from Maseno University with experience in Project Management who advocates for Economics of Sustainability. He is currently working at Naivas Limited leading General Merchandise Section towards sustainability. You can reach him via mail at: Maningapatrick97 @ gmail. com.