Is it Time for Replacement of Income Tax?

Posted on October 17, 2021

Is it Time for Replacement of Income Tax?

With American taxpayers burdened with taxes, many are contemplating whether there is a much more effective way to charge taxes, a change in the tax system that can bring in more equality and reduce evasion of taxes. Replacement of income tax with consumption tax can be a possibility, but it comes with its own pros and cons.

Consumption tax is when tax is charged on commodities and not on income. At the time of buying commodities, people will need to pay additional taxes. An advantage of consumption tax is that it curbs excesses. If tax is charged not on income, but on expenditure, people will restrain their expenditure when taxes go high.

If consumption tax is brought in as a replacement of income tax, the rich and super-rich, who pay less tax than the middle and lower-income groups under the present tax system, will be paying more tax than what they do at present.

In theory, consumption tax sounds better than income tax, but in practice, it is very difficult to implement. Taxing of every commodity from a hair pin to a refrigerator is a colossal task.

Presently, countries that charge consumption tax such as value added tax and sales tax also have income tax. Replacing income tax will require the overhauling of tax codes, which in itself can be a mammoth undertaking.

Whether consumption tax can replace income tax is a smaller question. The larger issue at hand is whether there is need for a complete replacement or better implementation of already existing system will suffice.

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