Question

• Some economists and policymakers argue in favor of replacing the current income tax in the USA with consumption tax. What are your opinions on the issue? How do think such change impacts your income and expenditure pattern? Which tax method do you prefer- Income tax or consumption tax? Why? What are the pros and cons of the two tax methods?

Answer 1

A consumption tax essentially taxes people on every point of consumption of goods and services or in other words they are taxed whenever they spend money. Whereas the income tax you're taxed when you earn money from different sources like interest on loans or savings, dividends on shares held, capital gains (increase in the share prices) and so on. And in a consumption tax that wouldn't be the case, you would only be taxed when you actually spend money.

A higher consumption tax and a lower or insignificant income tax will make the states more attractive as a business hub to different corporations, employers and employees (who will have to pay no income tax on their salaries) and would simplify their tax code, and would curb government spending.

Many economists agree with the view that the economy would be better served by consumption tax, rather than income tax. Their point is that that taxing consumption, rather than income, can lead to increased saving and investment. However, economist are also apprehensive that the burden shift will be more on the poor rather than the rich as consumption tax is not progressive and each and every individual of the society irrespective of his income will pay equal tax. This would contradict the principal of equity of taxation.

Some who praise the idea of consumption tax argue that illegal income, black money and unaccounted income will come under the tax purview with consumption tax which will surely increase the size of the revenue and therefore the economy. Tax evaders, those who make money through illegal sources and are paid under the table, would no longer have a tax advantage. They too are forced to pay sales/consumption tax each time they purchase goods or services. Another advantage of consumption tax is that it only applies to the spent money rather than earned which for a rational consumer who try to save is a boon. This also means that nobody is forced to pay tax like income taxes.

Overall, it could prove to be the better system if the principal of equity is taken care of and abuse could be controlled.