Consumption Tax versus Income Tax

Last updated on October 16, 2021

Income tax is being preferred over consumption tax, but with changing times would it be wise to switch to consumption tax? The necessity to look for alternative methods of taxation itself raises doubts over the effectiveness of income tax. With tax evasion rampant, many are discussing the value of consumption tax.

Consumption tax is the tax that is charged on articles of consumption. Value added tax and sales tax are indirect consumption taxes. If income tax is replaced with consumption tax, instead of the income, tax will be charged on commodities. That means it is the spending that will be taxed and not the earning.

The reversal from charging taxes on expenditure and not income has its own advantages and disadvantages.  An advantage of consumption tax is that it curbs excesses. If taxes are high on commodities, taxpayers will automatically spend less.

It is common knowledge that the rich pay lesser taxes than middle and lower-income groups. If consumption tax is brought in as a replacement of income tax, the rich will also pay the same amount of taxes on the commodities they buy as the rest of the citizens irrespective of their income level.

A major drawback of consumption tax is that it is hard to implement. Taxing every commodity, however small, is a colossal task, which can be difficult to implement even at the state level.

Whether consumption tax can be more effective than income tax is an open debate, but looking for alternatives is a sign that change is desired.