What are the advantages and disadvantages of an income tax?

An income tax is a tax on income, whether salary, inheritance or investment gains. This is often contrasted with a consumption tax, where goods and services consumed are taxed. Some argue that the consumption tax is more logical, as it is argued that people who earn more would reasonably spend more, making the tax structure more equitable. Others argue that there is no guarantee of this, however, and that a consumption tax would cause consumer prices to rise significantly.

The advantages of imposing an income tax can include the following:

  • People pay taxes based on total income, so people who earn less theoretically pay less.
  • Not all people consume at the same rate, so an income tax is a more equitable way of assessing taxes than a consumption tax.
  • People with lower incomes would be the hardest hit by a direct consumption tax, as even necessary items such as cars would be significantly more expensive.
  • Income is an easier way to collect taxes and decide on deductions. While people can handle some pay stubs that they need to save, on excise tax, people might have to keep receipts for every purchase they made for a year to qualify for tax benefits.

This type of tax also has some disadvantages:

  • Tax collection is generally considered more difficult than a consumption tax, which would be collected at the point of sale.
  • For those in the lower and middle classes, an income tax can be a financial hardship, regardless of the amount.
  • Some believe that the income tax is a violation of a citizen's individual freedom. They argue that this violates the individual's right to decide how to use the money he earns.
  • People paid "under the table" can avoid paying any income tax.

Both tax methods are in use in the United States. Most states and many cities impose a consumption tax or tax on certain items. Many also require people to pay state income tax as well as the federal government. This leads to the claim that US citizens pay taxes disproportionately based on where they live, whether state to state, county to county or rural to urban. Those who claim that this is a disadvantage of the current system believe that it would be better to have a system that determines taxes more equitably.

One idea that is gaining more and more support is the so-called FairTax. This would be similar to the consumption tax, and some think it would benefit not just individuals but businesses as well. Under that plan, people would pay a 23% tax on the purchase of most goods and services, often excluding food. When added to state sales taxes, this would raise purchase taxes to around 30% in most cases. Some proponents argue that this method would lower prices and make production cheaper. Others say the middle class would bear most of FairTax's taxes.

The tax method is complex and requires extraordinary scrutiny. Any change in the method of taxation in the United States would require congressional approval and possibly constitutional amendments.

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