US Consumption Tax vs Income Tax Reform: Details & Analysis

I think that the progressive tax unfairly punishes small business owners and stifles creativity among entrepreneurs because it causes a higher tax burden to these people. To replace traditional tax structures, it would need to be quite high. Most estimates for the inclusion of a consumption tax in the United States peg the estimated rate to be at 23-34% on the purchases of all qualifying goods. If your $100 item suddenly costs $134, that might discourage people from making a purchase.

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On the other hand, the stability of a welfare state, health care and education reduce uncertainty and problems such as health bankruptcy. There is no clear correlation between the tax burden and the rate of economic growth in the long term. That would be like a 60 percent tax on all of the money that you had saved up over the course of your life. And there are other transition issues too, like the way it affects businesses. Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income.

Two commonly cited concerns when moving to a consumption tax are the distributional impact and transition. We briefly discuss both concerns and highlight options policymakers may implement to address them. As per the Income Tax Act, 1961, there are special grants exemptions specified, due to which one can save tax if their income is a part of those grants. Income earned on which the government asks you to pay tax is known as taxable income. Each of the assessees is entitled to carry forward the losses if they were unable to set off any of the losses incurred against the earned income subjected to income tax rules and provisions. In case the assessee attempts a tax evasion, he or she cannot carry forward the losses.

Additionally, some provinces levy a completely separate retail sales tax that is not a VAT. In other words, prioritizing a tax code that is simple and pro-growth can raise revenues for government spending priorities while boosting living standards relative to the tax system we have today. Like studies that simulate the benefits of moving toward consumption taxes, econometric studies likewise indicate benefits from cash flow from operating activities cfo definition taxing consumption. Another perceived advantage to implementing a consumption tax rather than a tax on earnings is that it does not tax savings; it only applies to monies spent.

October 2011 – Republican presidential hopeful Herman Cain’s recently proposed “9-9-9” tax plan features a consumption tax. In this March 2005 interview on the NewsHour with Jim Lehrer, Len Burman and William Gale explain what a consumption tax is and discuss the effects one would have on the economy. Many countries, including many European countries, have a consumption tax. Japan, Australia, New Zealand, Singapore, Canada, and India are among the countries with a form of national consumption tax. An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy.

thoughts on “The impact of taxation”

Replacing the current income tax system with a consumption tax would create transitional effects for people currently holding capital by affecting asset values. On the one hand, repealing the income tax would increase the after-tax return to capital, increase demand for capital, and thus increase its value. On the other hand, imposing a consumption tax would reduce the value of existing capital. It is likely the value of most existing capital falls at least somewhat, meaning shareholders face a one-time tax burden on their wealth (their existing saving) at the time of transition. The one-time tax on existing wealth would be progressive given that asset ownership is skewed toward the wealthy. We find a consumption tax reform would reduce the economic, administrative, and compliance costs of the U.S. tax system, leading to increases in employment, wages, output, and incomes while improving the long-term well-being of American families and children.

1. Those who make money through illegal means or who are paid under the table, would no longer have a tax advantage.
2. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.
3. It would likely be more difficult for the government get enough money when people save more of their cash in order to lessen the amount of taxes they are paying.
4. We find a consumption tax reform would reduce the economic, administrative, and compliance costs of the U.S. tax system, leading to increases in employment, wages, output, and incomes while improving the long-term well-being of American families and children.
5. With the increased funding that is potentially available, those debts could be reduced or even potentially eliminated.

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By applying a progressive taxation system, the rich are asked to pay more taxes as compared to the poor. Taxes paid by the rich section of the society are utilised for social services that particularly benefit the disadvantaged sections of society. From education and health, to housing and employment, the government is launching and running various welfare schemes to provide benefits to Indian citizens.

71 A destination-based tax is like a traditional Individual Retirement Account (IRA), as the tax exempts U.S. production sent abroad but taxes returns to activity abroad in the form of imports. Similarly, traditional IRAs exempt contributions but tax the returns to contributions when withdrawn. An origin-based consumption tax is the reverse, as it offers no export exemption and levies no import tax. An origin-based tax is like a Roth IRA, as it applies tax immediately at the source of production in the U.S. but does not tax returns from investment abroad in the form of imports. Likewise, Roth IRAs tax contributions immediately but do not tax returns to those contributions when withdrawn. Families at different income levels would experience different changes in their net benefits under the proposed reforms.

Imposing higher rates of taxation on people may escalate discouragement to work hard and save. They will start believing that the more their earnings and savings, higher will be the taxation. If you are not paying income tax in India, then you are not liable for any tax deduction, as per Chapter VIA, for investments like insurance premiums, medical premiums, etc.