Question

How could the current personal income tax be modified so that it becomes a consumption tax? In what way can consumption be regarded as a better index of ability to pay taxes than income? Does an income tax penalize the saver while a consumption tax does not?

Answer 1

Modification of current income tax to consumption tax:

In order to modify the current income tax to consumption tax the following steps are needed to be take:

1. Introduction of new legislation and provisions is the first step towards that direction.
2. Income tax is on the basis of income whereas consumption tax has to be on the basis of consumption thus, the measurement yardsticks of consumptions have to be clear and understandable to the tax payers to create no confusion.
3. The rates of income tax on consumption of different items have to be different as it would not be correct to have same rate of income tax for necessary food items and other luxurious items.
4. The statutory limit for consumption tax has to be ascertained.

Ways to regard consumption tax as better tax than income tax:

Income tax tends to penalize the high earners for their high income. Consumption tax thus, would be a better yardstick to measure the accrued tax of citizens of the country. The individuals who will take the hard yard to save its earnings will be rewarded as they will not have to pay taxes on the amount of savings as they have to do under the income tax provisions. Consumption tax will reduce the overall tax burden on the tax payers.

Income tax penalize the savers whereas consumption tax does not:             

Yes, it is true that income tax penalize the savers whereas as consumption tax would reward them for their savings. This is because the income tax is charged on the amount of income thus, even if the tax payers save a portion of his income it will not be considered for reduction of income tax. Consumption tax on the other hand will be on the amount of consumption and thus, the savings wil not be in the tax net under consumption tax.