Advantages And Disadvantages Of A Income Tax Economics Essay

Bryan Patrice believes in trust and hard work. He is a very good Fund Manager and Financier. He has skills and a lot of experience to complete his job. Bryan provides the best solution to its clients for their financial plan. An income tax is a rate charged on the income of individuals as well as businesses (companies or other legal entities). Individual income taxes often tax the total earning of the individual, while corporate tax often taxes the net profit of the company. Different tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. Tax systems define income differently such as the inclusion of windfall earnings, and often allow notional reductions of income such as a reduction based on the number of children supported.

Generally the income tax is employed in a progressive manner, meaning as one earns a higher salary a higher proportion (percentage) of his income is taxed. The idea of a progressive income tax has garnered support from economists and political scientists of many different ideologies, from Adam Smith in The Wealth of Nations to Karl Marx in The Communist Manifesto. Income taxes used in most countries around the world are characterized by a progressive scheme but are not without criticism.

The Disadvantages

The implementation of an income tax system is very complex, especially when trying to regulate the rich and corporations. So complicated in fact that an entire industry exists to simply monitor and control the system. The government must enforce every line of the tax code, for example, in the US the IRS requires 90,000 tax accountants. The IRS and tax audit industry might do more for the economy if they were retrained in some other manner.

Another part of the same industry of tax accountants consults the big corporations and the rich on ways how to exploit tax policies’ loopholes. Tax evasion and deceitful avoidance favor the wealthy as they are the ones able to pay for costly tax ‘advice’. As legendary investor Warren Buffet has been known to say, it is unfair that his secretary pays 30% in taxes while his accountants manage for Buffet to only have to pay 17% on his income.

Some argue that for those in the lower middle class and lower classes, an earnings tax may be a financial hardship, regardless of the amount. In cases where households are just living by their means, any deduction even the smallest may result in a significant decline in the standard of living, unlike income deductions to high grossing households who save the majority of their income.

Others believe that income tax is a violation of a citizen’s individual freedom. Especially Libertarians argue that tax on earnings violates the individual’s right to decide how to use the money he earns. They also state that a progressive tax code is unfair to the wealthy and favors the poor, by calling it a tax on success. In the US in 2007, half of all income tax revenue was paid by the richest 5% of the country.

An income tax that gets progressively more burdensome the more money you make reduces the incentive to work harder and be productive the higher you move up the ladder. While income tax disincentives working more and incentivize working less at the same time, the Laffer curve portrayed below highlights the trade-off between work and tax revenue.

The Advantages

The income tax allows for progressive taxation on the amount of money you make. A person making €15,000 a year will pay less (percentage-wise) than someone making €150,000 a year. This is an effective strategy to distribute wealth. Considering most of the population fits into the lower brackets, most of the population should favor such a program. Without an income tax, personal and corporate profits would be out of control and unregulated. Unscrupulous individuals and greedy corporations could earn heaps of ill-gotten money since they would not have to account for their earnings.

This current system also allows for a stable income stream for the government. For example, even at 10% unemployment, 90% of the workforce is still making money. As the workers make money, the government can maintain an income stream, even in a depression. Income tax helps the government build a superior infrastructure, which otherwise would be probably impossible to finance through expenditure tax only.

By comparing income tax to its expenditure counterpart others argue that not all people consume at the same rate, therefore a tax on earnings is a more equitable way of assessing tax than with a consumption tax. People with lower incomes would be the most impacted by a straight tax on consumption since even necessary items like cars would be significantly more expensive. On an individual basis income is an easier way to levy taxes and decide deductions. While people may deal with a few payslips they have to save, in consumption tax, people might have to save receipts for every purchase they made during a year in order to qualify for tax breaks. In this sense, income tax is more flexible because it allows people to claim deductions on their tax returns, such as childcare expenses, losses of personal property, and other financial challenges.