Question

Assume the federal government replaces the federal income tax with national sales tax on all consumption expenditures. Analyze the impact of this tax change on taxation efficiency and equity. Note that the federal government already collects a nationwide consumption tax through excise taxes on gasoline, liquor, and tobacco.

Answer 1

It's a convincing thought, replacing the federal income tax with a national sales tax. The most grounded case here is that the IRS has turned out to be excessively nosy, excessively intrusive and debilitating, and it is unethical for the legislature to know such a great amount about our own pay. Another contention against the national sales tax is that saddling wage diminishes profitability and damages work development, as private venture arrangement has been sliced down the middle since 1978, while assess rates and intricacy have consistently risen. Independent ventures have been the driver of employment development in the U.S. Look to Venezuela, where President Nicolas Maduro is raising duties by pronouncement, where little businesspeople reveal to me they confront rates higher than 90%, and work development has fell while expansion has taken off, with sustenance lines around the piece. "We are surrendering maintaining our own particular organizations since why work when the legislature just takes what we do with extortionary rates?"

Burdening utilization could conceivably diminish spending, however the contention here is less interest for shopper merchandise could bring down costs and furthermore buyer obligation. What's more, if individuals put off burning through cash they may rather expand their funds, which is money to contribute that could make financial development. Another argument against a national sales tax is that it would hit the poor harder, would likely hit benefits and not simply merchandise, and would raise issues of decency (state and neighborhood governments would likely hall for laws to make themselves excluded so as not to pay it).

Efficiency:- When the two taxes are compared with respect to economic efficiency, the comparison usually involves two stylized structures: a general tax on all personal consumption, and a personal income tax applied to a comprehensive income base.  The income tax, by reducing the net rate of interest received, discriminates in favour of current consumption and, therefore, creates additional inefficiencies by discouraging savings.

Equity:-With respect to fairness, the comparison of the two taxes involves both horizontal and vertical equity aspects—that is, the equal treatment of equals, and the equitable treatment of unequals. Both taxes generate horizontal equity variations, but for different reasons. In the case of the personal income tax, horizontal inequities are mainly created by (1) differential tax rates on different types of income and (2) special tax credits.