What are the advantages and disadvantages of an income tax?

A W-2 salary and tax return indicates how much was paid to an employee and how much was withheld in taxes.

An income tax is a tax on income, whether it be salary, inheritance or investment profits. This is often contrasted with a consumption tax, where taxes are levied on the goods and services that are consumed. 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 fairer. 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 are taxed based on total income, so those who earn less theoretically pay less. Not all people consume at the same rate, so income tax is a fairer way of calculating the tax than with a consumption tax. People with lower incomes would be most affected by a direct consumption tax, as even necessary items like cars would be significantly more expensive. Income is an easier way to collect taxes and decide on deductions. While people can handle some pay slips that they need to save, on consumption tax, people might have to keep receipts for every purchase they made for a year to qualify for tax breaks.

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 the middle and lower classes, 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 they earn. People paid “under the table” can avoid paying income taxes.

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Theoretically, people who earn less also pay less when income is taxed rather than consumption.

Both methods of taxation are used in the United States. Most states and many cities impose excise or sales 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 are taxed disproportionately according to where they live, whether from state to state, county to county, or rural versus urban areas. Those who claim that this is a disadvantage of the current system believe that it would be better to have a system that assesses taxation more equitably.

One idea that is gaining more and more support is called FairTax. This would be similar to the consumption tax, and some feel it would not only benefit individuals, but businesses as well. Under this plan, people would pay a 23% tax on purchases 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 less expensive. Others say the middle class would bear the brunt of most taxes under FairTax.

The method of taxation 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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