My dear friend Vivek Haldar has often talked to me about how a country should have a consumption tax instead of an income tax, arguing about the merits of the former. His contention is simple – why be taxed for something that you have earned? Taxes, he argues, should be levied upon people when they are trying to purchase something. Or when they are using a means of transport like a road. That way people earning more will not feel shortchanged by income tax. Also, people with moral objections to supporting unknown people via schemes like social security will have reason to be happy about.
Savvy? Not so. Well-intentioned though the plan may be, it is fraught with difficulties. How will a country pay for things like defence if there is no income tax? Ok. So we can have a flat tax for defence. And how will people whose job doesn’t involve generating any profits (like the President?) get paid? Well, there could be another flat tax for all administrative and judiciary management, which will cover things like law and order etc.
Then there is a question of quantisation. Are these flat taxes we are talking about going to be fixed values or percentages of income? A fixed value tax might completely wipe out the income of a person earning little and the tax will be for things that probably concern him very little. And a percentage of income tax essentially means going back to square 1 – you are looking at the capability of a person to pay and then you are making that person pay accordingly.
Can a compromise be struck? The more I think about it the more sense it makes to have the plain old income tax as opposed to a consumption tax, simply because the number of things where it is difficult to define consumption is simply overwhelming. Here are examples:
- Space research, or for that matter, any kind of research that is funded by the government. None of us is a consumer of research, but we all agree that we are benefited by it in some way or the other.
- Use of intangible resources. It is possible to track how much of the country’s roads we are using by simply tracking the mileage on our vehicles and taxing us accordingly. But what about cases like using manpower for work. Let’s say you own a company and employ a fairly large number of people. You are, by virtue of using these people to attain your profits, using resources of the country. But how are you going to pay taxes for them? And to whom?
A lot of similar examples can be advanced in this regard.
Now let us approach the problem from a different angle. Let us assume that we have handled the complex issues of defining consumption and thereby put together a taxation structure in place. Now let us look at some numbers. An average single person in the US pays a certain amount of tax each year. If we were to get rid of income tax and make the entire system consumption based, then extracting the same amount of money in taxes could result in a phenomenal amount of taxation on what you consume. You might be paying 3 times the cost of fuel in taxes for the distance you travel.
One of the contentions of taxpayers is, why pay taxes for social security benefits when all you are doing is creating a safety net for yourself and paying for other people of your age to get along in life. Point taken, but again, with a pinch of salt. The fact is that if unemployed or homeless people aren’t given a helping hand they soon resort to catastrophic means with disastrous consequences.
Of course. Over the ages our weapons have grown more sophisticated. With Gotham we tried a new one. Economics. But we underestimated certain of Gotham’s citizens, such as your parents. Gunned down by one of the very people they were trying to help. Create enough hunger and everyone becomes a criminal. Their deaths galvanized the city into saving itself, and Gotham has limped on ever since. We are back to finish the job. And this time no misguided idealists will get in the way. Like your father, you lack the courage to do all that is necessary. If someone stands in the way of true justice, you simply walk up behind them and stab them in the heart.– Ra’s Al Ghul to Batman in Batman Begins
The upshot – while income tax is not the nicest way to spend one’s hard-earned money it is a tried and tested method of moving a society forward. Unless we come up with answers to the various issues that plague the assessment of consumption and how to tax it, we are better off with income tax.