Monday, February 27, 2006

Income taxes Vs. consumption taxes

Income taxes are THE most complex taxes. We’re often told that they’re cheaper to collect. Their revenue/expense ratio may be superior. No one actually knows how much income taxes are evaded or what are the total collection AND compliance expenses. The taxpayer’s compliance expenses, (i.e. administration, time, and stress) may or may not be greater than the government’s collection expenses. IMO we utilize income taxes for the same reason that Willie Sutton robbed banks, "that's where the money is". Income taxes produce the greatest revenue. Dependent upon your political philosophy, that may or may not be an advantage.

Consumer taxes are very much simpler. Their collection and compliance expenses are not particularly expensive. I prefer the value added tax, (VAT) rather than the sales tax. VAT almost immediately refunds any businesses taxes for consumed goods or services. The enterprise deducts any taxes paid from their taxes collected and sends the difference to the government. Both the government’s and taxpayer’s expenses are less (than sales tax). Compared to almost all other tax methods, the simple paper trail is more conducive to compliance rather than evasion.

If we were to replace income tax revenues with a consumer tax, it would be prudent to do so gradually. It would also require some provision to protect low income earners. IMO we’d gradually approach an unacceptable consumption tax rate, at which point the conversion would halt. I wish it were otherwise.

If we can only lower, but not be rid of income taxes, we should make them simpler.

Please enter your comments to this message. Respectfully, Supposn


Post a Comment

<< Home