Consumption and Income Tax: A Detailed Comparative Evaluation

This essay provides a comprehensive analysis of consumption and income tax systems. It begins by highlighting the importance of taxation for economic growth, differentiating between direct and indirect taxes, and discussing the role of value-added tax (VAT). The essay then explores Adam Smith'...Read More

CONSUMPTION AND INCOME TAX
Tax collection is very important for any country as through this collection
the economy of the country grows, and tax is levied on individuals or
organisations for buying and selling of goods and services.(Miller and Rose
) But as many people are not happy with [paying taxes to the government
but still they are very important for the growing economy as these
contributions are used to build many new projects in the country like for
example school for education, construction of roads,hospitals,wages of
government employee and government servants including others. This is
very much justified to impose tax on the public and organisations for the
welfare of the economy(De Groot 2006)
Classification of tax can be done in two broad categories one is direct tax
and the other one is indirect taxes both taxes can be either in cash or
through electronic way. According to Meade(2013) difference is that direct
taxes is paid directly by the person who is liable to pay like income tax,
property tax, corporation tax .The other is indirect taxes like vat, service
tax ,sales tax which is not directly paid .collection of tax play a very
important role as according to survey 25 to 45 percentage of national
income is collected through tax, Many countries manage their deficit
issues by generating more revenue through collection of tax from public
which is very important to meet the current economy scenario(Vogel
2014)
However about current tax scenario every individual should have clear
and proper understanding of the tax principles and system of it .A clear
understanding and a clear picture gives a proper information of the tax
system in the country which helps the tax payers to easily co link the tax
to be paid to the government.(Mirrlees 2011)
INDIRECT TAXES
Indirect taxes are taxes paid by the tax payer when goods are purchased
from the seller and as a part of the goods value it is paid directly to the
seller of the goods as an expenditure towards the product and then it the
seller responsibility to pass on the taxation part to the government.
Indirect taxes generally include value added tax, postage duty tax,
custom duties and excise duty levied on tobacco products, alcohol and
other products.
The concept of value added tax has received more attention in recent
time. As at the time when European Union formed and consist of ten

states most of the European Union members used value added tax as the
tax policy rather than other tax system. Comparison to old European
Union members(McCormick 2017) they have higher rate of tax compare to
new European Union members states. This difference in tax structure has
increased competition between old European Union member state and
new European member state.(McCormick 2017)
According to Schenk(2015).The value added tax came into effect on 1st
January 1973 in UK.This is tax charged on sales value of the goods. This
tax has become an important source of government revenue and
increasing the treasury of the government fund and it comprise of total of
16 percent of total taxes collected.
The value added tax is such a tax which cannot be avoided and it has to
be paid, though the nation UK has exempted many items which are out of
scope of VAT as comparison to other nation, as UK AND Ireland are the
main nation in the European union in which zero rate tax prevail for most
of the goods like books and clothes to children. In few European nations
there are products in which standard rate of tax is applicable to few
extreme products. The expense on which the vat is applicable is very
high.
According to Keen(2008)The value added tax can be considered as an
income as it is a type of final tax levied on final product and depending
upon the nature of the product prices can vary. The most important fact is
that value added tax can be levied on input part only which ensures that
the small and Medium Enterprises are not taxed. People believe that the
main advantage of value added tax is to increase revenue but the main
purpose is to bring fairness, efficiency and transparency which are
relevant for discussion. Some believe it is a very good tax as it is does not
affect the incentives to work, some argue it is a bad way of generating tax
as the main burden to borne the tax shifted to poor people who are not in
a position to pay rather than on rich people, in reality both the views are
not correct regarding the value added tax.
DIRECT TAXES
Direct taxes are taxes which are paid directly by the individual or
organisations in his or capacity to the authorities of tax. According to
Mirrlees (2012)The main source of income generation of tax authorities
through direct tax are income tax, capital gain tax, corporation tax and
inheritance tax. Companies pay the most important direct tax i.e. the
corporation tax. These taxes rates are looked after by HM Revenue and
custom department which was formed in the year 2005, April through the
merger of Customs and Excise and the Inland Revenue and National
Insurance Premium, they both are managed by National Insurance
Contribution Authority of HMRC.

The income tax slab is made in a progressive pattern slab, that is if you
receive a higher salary than you come under a higher tax bracket and a
higher rate of tax will be payable by you. This idea of progressive pattern
of slab is supported by many great ideologists and scientists. Generally in
almost all nations income tax is applied in a progressive style and this is
accepted with utmost heart and not with any criticism.
Income on which direct taxes applicable are salary income, self employed
income, bank interest, pension income, companies engaged in
construction, business which are non registered and dividend etc.Income
generated as profit from social service are not considered as income and
subject to income tax. Government also allow few income to be non
taxable in the hands of receiver like state pension but government has not
set up any benefit or allowances for people with disability. Any donation
given to relief fund or registered charity can be deducted from the total
income for reduction in tax. Individual is not liable to pay income tax on
certain income such as income from saving certificate,kmk certificate,
saving investment product and individual saving account. Pension
contribution by employer and employee and social security contributions
are not allowed as deduction from employee salary for taxation purpose.
(MacDonald and Osberg 2014)
ADAM SMITH AND FOUR CANONS?
According to Adam smith taxes should be taxed in such a way and
accordingly in a way the citizen derives benefit from the state and the
taxing system should be appropriate, fairer and effective.
The tax should be proportioned in such a way the person derives benefit
from living in the society. The proportion of income should be very much
fair whether it is a rent, wages, income or profit. Adam also pointed out
that how few taxes like luxury tax fall dis proportionately only on the rich
people but is not bad too, but the main principle which smith focussed on
is proportionately. Every state needs to contribute towards the
government according to the earning capacity and profit and the
protection and benefit derived from the state in proportion to their ability
and benefit derived from the state.
Smith compared the tax system to the joint owners of an estate ,who are
obliged to contribute on the basis of the respective interest derived from
the estate. So taxpayers are also like shareholders whose shareholding is
more in a venture contributes more and whose shareholding is less they
contribute accordingly, this is similar to Nozicks theory of a private state.
Adam smith second point is that the tax which is required to paid by
everyone in the nation should be certain and clear enough .The time of
payment, manner and quantity of amount to be paid should be clear to
the tax payer and every other person .Knowing taxes to be paid by the tax
payer makes to create better plans for future investment and also

encourage them to invest in a plan which gives them maximum benefit
and are tax free for them which leads to productivity. The predictability
theme is discussed with must broader view by Hayek in many places but
with utmost clarity in the constitution of Liberty.
If the tax laws are not clear than the tax collectors can collect extra tax
from the public. The labyrinthian tax code and recent abuses by the IRS
show the truth and prescience of Smith’s maxims. With complex tax rules
and laws, person subject to tax can be put in trouble in the hands of tax
gatherer who can extort tax and money from the person.
Adam third point is that tax to be paid by the person should be easy and
convenient, that means the taxes which are to be borne by the tax payer
should be very easy and simple for them to pay and the contributor can
pay it in a very effective manner. Smith also pointed out that how the
government can tax more to people than they actually realize.
Adam smith another point about the good tax policy is reducing
deadweight loss “Every tax ought to be so contrived as both to take out
and to keep out of the pockets of the people as little as possible, over and
above what it brings into the public treasury of the state. Smith uses “take
out” refer to money taken from public and “keep out “refer to income
which is unrealized due to burden of tax, distortions .Smith describes
there are four ways deadweight loss can be created .Firstly, the
government hire collector to collect tax from the public the more they hire
the less revenue come into government treasury and less it will have to
spend in other construction projects. Secondly industry is also
discouraged through the taxation system as higher tax will create less
production and demand among the public and less revenue to the
authority. Thirdly higher rate of tax will force people to evade tax and will
create black money. Fourthly paying taxes for the citizen is burdensome
and very difficult, this can be considered as the biggest deadweight loss
for the nation as millions of people as engaged in the profession of tax
consultants and lawyers and spend thousands of hours in filing tax return
every year, so this cost is a clearly deadweight loss for the nation and
reduces productivity.
Adam smith point of taxation are not so unique today as it was before
when he first wrote them. Most people and ideologist believe that simple
and fair tax will promote growth of the economy. But due to complex tax
system and arbitrariness of our tax structure ,it cannot be denied that we
known about good code of taxation rules and laws for many years.
WHICH ONE IS FAIRER CONSUMPTION OR INCOME TAX?

This is generally an argument as comparing income tax to consumption is
very difficult as all does not consume at a same flat rate. As people who
falls under low income group and have low income are strongly affected
by some luxury items such as car .In order to claim the benefit people
always need to keep the receipt copy of the taxes paid in order to claim
the benefit in the tax return for the taxes already paid and this process
continues of keeping the receipt of taxes paid year to year
basis .Comparing the same with income tax it is not so rigid like
consumption tax rather it is more flexible as it allows the person to file the
tax return at the end of the year and claim benefit of whatever social
service expenses and other expenses has been done in a year.
Ideologists and economists claim that income tax is lower than
consumption tax due to time factor but this is not possible practically as it
is considered neutral only if the consumption pattern does not change or
does not affect natural resources. The expenditure is done only on
consumption part of tax, the product or service which has been used is
not anymore relevant interims of allocation of resources. A consumption
tax which is more organised is more neutral as comparison to other and it
does not affect the fund distribution in comparison to income tax. Taxes
what generally we pay is taxed on income of the people, services provided
to others and on goods and there is no tax to be borne by people on the
saving of the person .The saving of the person is not taxed this encourage
people to save more and invest there surplus money on government
bonds and debentures and create habit of saving and increase the
standard of living of people and the saving of people also help them to
survive to the unforeseen risk in future. Saving habit also increases the
capital of the people and also helps in development of growth of the
economy.
Income tax is also an argument for lower class of people and middle
classes that it is a constraint for them and on their decision regarding the
financial decision. Poor families and lower class families who generally
depend on their monthly income for survival and any small deduction in
income can have a big impact on their living standard as the smallest
income deduction also means a lot to the low level families, while the
income deduction of high class families who generally save most of their
income matters very less and does not affect their standard of living and
lifestyle. It is also beloved that income tax is a violation to the citizenship.
As Libertarians further argued that levy of income tax restrict the right of
individual to decide where to spend the money and how to use it
further .It is also been criticised that progressive rate of tax is very much
unfair for the rich as they are taxed at a very higher rate comparison to
poor people and it is advantageous for them and favours them calling it a
huge success.(Mellville2017)

The layout of the tax is dependant not only on the part of equity and
efficiency but also on other cost of enforcement .In this whole write-up we
have talk about the income tax and consumption tax and compared the
same and payment of both taxes ,like payment of income tax that has the
chances of declaration of income low than actual in order to evade tax
and create black money thus creating a blockage in the growth of
economy and the other is consumption tax levied on products ,the
customer in order to avoid the consumption tax can buy the product from
the black market were consumption tax is not levied and thus getting the
product at a cheap and low price creating a tax evasion .
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