Question

Post your idea for a better tax system and what you see as advantages or disadvantages to your recommendation. Feel free to research on other nations' taxing systems. As you create your own system of taxation and evaluate and comment on your colleagues’ suggestions, keep these criteria from Chapter 1 in mind: Sufficiency: involves assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues. Equity: how the tax burden should be distributed across taxpayers. Certainty: means that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax. Convenience: tax system should be designed to be collected without undue hardship to the taxpayer. Economy: should minimize the compliance and administration costs associated with the tax system.

Answer 1

For making taxation system to be simplified , it would be better to just abolish income taxes and impose only indirect taxes where tax will be imposed on consumption of goods and services. Because income tax brings with it a lot of complexities and avoidance of people to pay tax or if strigent action is taken against them then they may move to other nations which will lead to a situation of brain drain

Now the critics of these system will say that this system is not in keeping with progressive taxation system and will lead to inequality of income. But it is actually not so we can have two slabs of taxation in such indirect taxation system. One a lower taxation rates which consists of essential goods like vegetables, fmcg and rentals on home. And other higher taxation rates for luxurious goods like cars expensive wines etc.

Also a rich person will purchase a lot of goods and thus will end up paying more tax as people who are not so rich generally do not put more expenses on goods and services and will end up paying lower taxes . Thus, in whole it is similar to progressive taxation.

Advantages of this system

1. The first and the foremost benefits of such system is when there will be no income taxes more and more businesses will be established in the country which will lead to a lot of employment . People will be having enough money with them. Also since there is no tax thus people will be having a higher Net disposable income with them, thus they can spend a good amount of money on consumption which will ultimately increase the tax collection.

2 . Lower administrative cost = there will be lower administrative and compliance cost since people will not be required to pay any income tax thus they will not make any unnecessary efforts in evading and ultimately tax authority will not be required to go after them.

Disadvantages of this system :-

1 . Lower tax collection = Initially such a system may lead to a lower overall tax collection since no doubt income tax comprises of a major part of tax revenues of a government. But later on such loss can be compensated with higher tax revenue in future due to increased consumption power of people.

2 . May lead to inequality = Generally in most places by imposing progressive income tax , government tries to brings level of inequality in income of people down but such thing is not present in consumption based tax. However, by bringing two slabs in the system we can somehow try to reduce the side effects of this taxation system.

Sufficiency : As far as sufficiency of tax revenue is concerned slowly and steadily tax revenue of the government will increase as the level of income of people and their consumption power will increase as described above.

Equity : taxburden can be classified by distributing entire goods and services between two sets one is essential goods having lower taxation rates and one is for luxury goods having higher rates

Certainty : since the consumer pays the tax immediately on consumption of goods and services but it cannot be paid by the seller like this it will make the system cumbersome. So seller may collect the tax and then deposit it on a monthly basis.

Convenience : Today is the time of doing everything from the place you are i.e. through your smartphones. Thus the the entire system of tax payment and Return filing must support working from mobile.

Economy : since the tax payment and return filing process will be done online thus , we will need to have a very limited staff thus reducing the level of expenses on administration and compliance to a great extent .