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A tax on earnings is a tax on income whether it be salary, inheritence, or profits from investments. This is often contrasted with a consumption tax, where taxes are imposed on those goods and services that are consumed. Some argue that consumption tax would be a better way to go than tax on earnings, since it is argued that people who earn more, would reasonably spend more, thus making the tax structure more equitable.
The advantages of imposing a tax on earnings can include the following:
Some disadvantages of a tax on earnings include:
Both methods of taxation are in use in the United States. Most states and many cities impose a consumption or sales taxes on certain items. Many also require people to pay state income tax as well as federal income tax. This leads to the claim that US citizens are disproportionately taxed according to where they live, be it 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 best to have one system in place that assesses taxation more equitably.
An idea that has been garnering increasing support is called FairTax. This would be similar to consumption tax, and some feel it would not only benefit individuals but also corporations. In this plan, people would pay a 23% tax on purchases of most goods and services, often excluding food. This would in most cases, along with state sales tax increase taxes on purchases to about 30%. Some argue this method would lower prices and make production less expensive. Others say that the middle class would bear the burden of the majority of taxes under FairTax.
The method of taxation is a complex one that requires extraordinary scrutiny. Any change to the method of taxation would require congressional approval and possibly constitutional amendments. On this issue of tax on earnings, abundant and multiple opinions exist which further complicate matters.
Cupcake15-I agree that a consumption tax like a national sales tax would be fair. I also like the idea of the flat tax which would make all Americans pay the same percentage of tax.
This would eliminate the tax on social security earnings as well as the federal tax table. There would be no need for income tax estimator because there would be no IRS and everyone would know exactly what they would owe in taxes.
I prefer a consumption tax vs., and income tax, but I doubt that congress will make any changes to the tax code anytime soon.
Income tax on earnings offers the federal government a more guaranteed tax base. Since most people work and have a job this would be the most consistent way for the government to receive tax revenue.
In addition, they can also tax income on overseas earnings. The federal government would be able to place an income tax on Social Security earnings as well.
The disadvantage is that not all people will file income taxes properly which creates a shortfall in tax revenue estimates.
A consumption tax is actually more equitable because all people would be paying taxes. Currently 50% of Americans pay no income taxes. A consumption tax would cause this 50% to contribute to the tax base and ease the burden on the top 10% who pay 96% of all income taxes.
The consumption tax would also allow tourists to contribute to the tax revenue which should add even more tax revenue for the government. The consumption tax is a good idea if they eliminate the federal income tax which seems unlikely.