A tax deduction is an amount that is subtracted from the amount that is counted as income for tax purposes. Common tax deductions are those for interest paid on home mortgages and donations to charity, for example. This doesn't mean that a household gets back the entire amount of the interest or the donation, however, since a tax deduction just means that those amounts aren't subject to the income tax. A tax credit, on the other hand, is an amount that is subtracted directly from a household's tax bill. To illustrate this difference, consider a household with an income tax rate of 20%. A $1 tax deduction means that the household's taxable income decreases by $1, or that the household's tax bill deceases by 20 cents. A $1 tax credit means that the household's tax bill decreases by $1.
Consumption taxes, on the other hand, are levied when an individual or household buys stuff. The most common consumption tax (in the U.S. at least) is a sales tax, which is levied as a percentage of the price of most items that are sold to consumers. Some common exceptions to the sales tax are grocery items and clothing, for reasons that we will discuss later. Sales taxes are usually levied by state governments, which means that rate differ from one state to the next. (Some states even have a sales tax of zero percent!) In some other countries, the sales tax is replaced by the quite similar value-added tax. (The main difference between a sales tax and a value-added tax is that the latter is levied at each stage of production and is thus levied on both businesses and households.)
Consumption taxes can also take the form of excise or luxury taxes, which are taxes on specific items (cars, alcohol, etc.) at rates that may differ from the overall sales tax rate. Many economists feel that consumption taxes are more efficient than income taxes in fostering economic growth.
