University Essay: A Comparison of Good Tax Systems (ACC5003)

This essay examines the debate surrounding consumption and income tax systems, arguing that consumption tax is often perceived as a fairer basis for progressive personal taxation. It begins by introducing the concept of tax fairness and the importance of distributional equity, highlighting the familiarity of income tax while introducing the idea of consumption tax. The essay then delves into a detailed discussion and comparison of both tax types, exploring their theoretical underpinnings and practical applications, including the use of graduated rates. The author argues that consumption tax is superior in terms of fairness and discusses the viewpoints of various economists and researchers. The essay also addresses potential criticisms, such as the failure of consumption tax to account for investments in human capital, and the role of government in providing goods and services. The conclusion of the essay emphasizes the importance of fairness and the need to consider taxpayer expectations, ultimately assessing the extent to which each tax type meets the desirable characteristics of a fair system, using relevant examples from the UK.

Running head: GOOD TAX SYSTEM
Good Tax System
Name of the Student
Name of the University
Authors Note
Course ID

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Introduction:
The viewpoint that the consumption not the income tax is fairer basis on which the
application of progressive personal taxes is noticed in the recent reviews of law. A report of
review has been created to understand the structures of tax in UK. To signify the increasing
respectability of the traditional idea among the economist is that experts review the
theoretical and practical considerations included the personal tax on the consumption (Lang
et al. 2014). The argument that the consumption tax should be preferred as the fair means of
tax has usually involved comparative view of two ideas of both the income and consumption
tax.
Wealth being the third traditional candidate for taxation based on the economic
resources has been characteristically left out of comparison based on the grounds that
whatever considerations would support wealth tax can be better taken into the consideration
by imposing tax on transfer of wealth. Separate consideration must not obscure the direct
comparison of the income and consumption taxes on the grounds of equity (Saad 2014). The
essay inspects the case of superiority of consumption tax. In regard to the emphasis on the
fundamental notions of income and consumption, the practical application of taxes can
certain eventually raise the question of fairness.
Discussion and Summary:
Fairness in the current context should mean or involve distributional equity but the
question rises of how the economic resources should be distributed fairly in the society. The
concept of income tax is undoubtedly familiar among the readers; the present proposal of
consumption tax might not be (Buenker 2018). Even though the case for the income tax has
historically been linked with progression whereas the same has not been for consumption tax.
The consumption tax that is proposed today is a personal levy which might be subjected to

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graduated rates. As a general rule, the goal of reaching the personal consumption may be
accomplished by taxing all the expenses on the cash flow basis with all the receipts including
the borrowings would be included in the tax base and all the non-consumption expenses
would be deducted.
Even though the theoretical literature of tax is littered with the multitudinous
definition of income, Gordon and Kopczuk (2014) stated that personal income might be
referred as algebraic sum of the market worth of rights exercised in consumption and the
change in the value of store of property rights between the beginning and end of the period in
question. Consumption refers to the ultimate usage or demolition of the economic resources.
The view that the concept is necessary but incomplete perspective in terms of the nature of
income tax. More precisely, concept allows the interpersonal allocation and attribution of
income among the individuals, an attribution which is necessary if the tax alone cannot be
collected at the source or given the progressive rates is implemented on the personal basis.
According to Roth (2018) an income tax serves to deflect the government a
progressive portion of every citizen’s share of the product. Whether the proceeds of taxes are
used for public goods and services or for redistribution to some persons, either in cash or
kind, such uses are financed by the labour output and private capital in the current period.
Imposing tax on income is viewed as logical attendant of the proposition where society in
general has the claim on its annual product which is before the claims of its individual
citizens.
According to Miller and Oats (2016) it can be evoked that the consumption tax that is
being proposed presently is the personal tax with the graduated rates. As a general rule, the
tax would be managed on the expenses or cash flow basis where all the receipts together with
the borrowings would form the part of tax base and all the non-consumption expenses would

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be reduced. The circumstance for resultant tax base as the matter of distributive fairness
where the interest of the society is simply the distribution of economic resources that goes
into the standards of living instead of the social product. Under this observation, the
collective decision making is viewed as the deciding both the amount and form of public
goods to made available for the public consumption that is impacted by the consumption tax.
Under the consumption tax, the moral claim for the citizens is for the fair share of
goods and services that is consumed during the period of accounting. Under the income tax, it
is for the fair share of the goods and services generated during the period (Snape and De
Souza 2016). An extreme democratic would first seek the equality among the consumers and
secondly equality among the producers. Consumption tax supporters have advanced grounds
for the income tax as inferior in terms of the fairness. The income taxes unfairly consider the
resources that are left in the common pool (Bankman et al. 2017). Consumption tax more
closely approaches utility, the ideal measure relating to the distributional justice. Income tax
discriminates against the savers and consumption tax is more preferable from the lifetime
perspective. The subject of income is fundamentally defective and consumption tax would
obstruct less with the individual liberty.
From the viewpoint of the income tax, the concept of consumption tax is considered
deficient for the reason that it is failure in taking into the consideration the fact that the
productive non-consumers services claim for the future consumption as the property rights
(Murphy and Higgins 2016). The producers do not have the present consumption, but
provides an individual with the option of additional consumption that can be used at will. The
question arises as why from the perspective of fairness, the prevalence of such options be
ignored.

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The answer is that the resources that are unconsumed resources are left in the
common pool, in a manner that it is inappropriate to the tax person till the person withdraws
their resources for personal consumption (Schmalbeck, Zelenak and Lawsky 2015). Indeed,
leaving the resources in the common pool can be regarded as socially desirable in a manner
that the capital supplied would increase both the future production and worker’s future
productivity.
An argument can be bought forward by stating that distributing justice must be
considered not simply with the income or the other means of the economic well-being,
though with the overall sources of a person’s utility, welfare or satisfaction (Mertens and
Montiel Olea 2018). Under this viewpoint, a perfect tax model should be one that applied the
view of society with the proper distribution of utility by considering not only the income but
all the additional sources of contentment as well. Even though not perfect, the consumption
tax would be considered as the best possible estimation because consumption is the best
noticeable phenomenon to utility.
The disagreement that distributive justice must be preferably comprehend altogether
every types of utility must be rejected as the basics for consumption tax for three main
reasons. Initially, if the consumption or the income is eventually a mental or emotional
concept, that the tax base not anymore precisely follows from the observable transactions
(Wilson 2015). The correct purpose of the tax liability would need the understanding of every
person’s capacity for preference due the purchase of similar objective at same price.
Secondly, even though the measurements were theoretically reasonable with the underlying
notions can be made sufficiently comprehensible, expanding the idea of distributive justice in
this way would not be desirable as the matter of policy.

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Thirdly, even though the utilitarianism were considered as the correct criteria of
selecting among the tax base, it is not certain that best estimation of utility based on
economic resources would be consumed alone (Stone et al. 2015). Individuals are not
certainly different in holding wealth, and it appears improbable that the satisfaction obtained
from being wealthy is restricted to any future consumption to be acquired with the wealth.
therefore, wealth may be suitable partially for utility and during the absence of wealth tax,
income might include both accumulation and consumption. The tax base and the fundamental
theory of distribution fairness must be restricted to economic resources and the choice among
each bases is not made easy by taking into the account the consumption as the substitute for
utility.
To establish the unfairness of the income tax, one senses not only the reason behind
treating the tax unfair, but why comparing is even more relevant. According to the conclusion
of Frey and Feld (2018) the assumption that fairness should be measured in relation to the
taxpayer anticipation instead of outcomes. The capital theory of Fisher’s takes into the
account the anticipated income streams in future periods as stated and discounts them to the
present capital value that exemplifies the world’s anticipations of the value of assets. Despite
the fact return from investment is uncertain, the discounting of future consumption to the
current value or the compounding of the current to future value forms the core of Fisher’s
argument which is not carried over from the perspective of “ex ante” to the “ex post”.
With respect to the argument that the base of income tax is less fair than the
consumption tax, the case for consumption tax has taken into the consideration the
proposition that the income tax is unavoidably inequitable due to the fact that income is
inherently defective concept which is not possible to elaborate rationally. The central
argument that the income tax is not possible to define, an expenditure tax is regarded as that

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concept of income which cannot adequately measure the capital gains because of the changes
in the interest rates.
As per the argument of Jacobs (2018) rise in the value of assets from the rise in the
anticipated income stream generated by the asset with the rise in the values originating
arising entirely from the change in the interest rate based on which the unchanged income-
stream is discounted. Another theoretical flaw which is found to inhere the concept of income
is its inability to transact with the investment in human capital. A person that makes
investment in a portion of wages in stock market or the real estate should invest in after-tax
dollars because of the fact that wages would attract tax liability. Similarly, a person that saves
fails to understand the appreciation in the value of corporate securities, even though the
criterion would prevent taxation under the present law until the appreciated assets are
disposed.
The critics of the income have bought forward an argument that every person own
human capital, that must be considered as the capital investment. Professional must be
considered as the wage earner that invest in the stock market, foregone wages must be
imputed to the professionals (Rose and Karran 2018). The argument further elaborates that
investment in human capital should be made from the pre-tax dollars whereas other
investment should be carried out from the after tax dollars. The reasonable inference of these
is that individuals should in principle be levied on the changes in the current value of they
can earn, beside the fact what they earn. So far, the idea of imposing tax on earning capacity
is not consistent with the widely accepted concepts of individual liberty since it would
disregard the personal choices.
The advocates of consumption tax have conclusively stated that the concept of income
is not capable of rational elaboration in society (Auerbach and Hassett 2015). Apparently the

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conclusion would also be applicable on the comprehensive wealth tax which is applied during
the lifetime of the taxpayer because human capital would be seemingly be included in the tax
base given the requirements of logic is reached by the income tax.
The rational inference of the income is certainly that human capital represents that
capital which must be treated like other capital. So theoretically, the imputed income must be
considered into the tax base similar to the theory where the imputed income is arguably taken
into the consideration (Moffitt 2018). However, as in the situation of consumed imputed
income the relevant issue is that whether the practical considerations prevent the taxation of
such income. Even though this element of income were considered to be incapable of
practical applications, then it would not establish that there was anything rationally defective
regarding the concept or taxes on increased earning capacity.
The concept of human capital cannot be considered as helpful in defining the base of
income tax due to the fact the concept is completely an ex ante formulation where no market
mechanism for realizing the value of capital. In comparison to the tax on personal earnings,
the consumption and the income tax is related with what a person chooses to do instead of
what a person may do (Huang and Rios 2016). Consequently, an argument can be bought
forward in this regard that both the income tax and consumption tax is preferable to tax that is
levied on the capacity since it interfere less with the personal liberty and choices.
A further argument can be bought forward by stating that if imposing tax on capacity
is avoided based on the interest of liberty and only consumed products should be entered into
the tax base. Therefore, the consumption tax should be preferred over the income tax due to
the fact that consumption tax is levied only when an individual decides to consume. It would
be perfectly reasonable to eliminate the leisure from the tax base, based on reasons of
personal liberty and at the same time to take into the account the economic capacity as the

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unconsumed income (Black 2018). It is certainly appearing obvious that consumption tax
provides individual with the liberty than the income tax view for collective decisions. Under
the income tax an individual’s collective responsibilities are concluded during production. In
contrast to this, under the consumption tax those responsibilities are not discharged unless an
individual’s last resources is consumed. Due to such inability of escaping the collective
accountabilities by consuming the current resources that has attracted majority of the
supporters to the consumption tax in UK.
Conclusion:
The argument regarding the superiority of the consumption tax over the income tax is
not considered convincing. The concept of income is better assumed as the interpersonal
perspective for measuring the share of every taxable unit of product of society’s personal
capital and labour during the period of accounting. The case of equity for income tax can be
premised based on the claims of society to a part of product for redistribution of public
goods.
The construction of human capital and the discounting of future consumption to
present value in general is not useful in comparing the two taxes. Nor does the consumption
tax appear superior in respect of conceptual coherence or its impact on the personal liberty.
Metaphors namely the common pool or the unknown level of psychological contentment
helps in choosing between the taxes which may be convincingly taxed on the monetary
resources. In short, either of the levy can be termed as fair tax policy in theory, however the
choice of whether the social product or standards of living is distributive justice can be
termed superior based on the ethical viewpoint.

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