Income tax is a tax levied by the government on an individual’s personal financial income. This tax is also levied on the income of corporate or legal entities as well, therefore making the people and corporate sector to pay a portion of their income to the government. Size of this portion varies from country to country, some governments charge a very high tax while others charge at a lower rate. Nevertheless almost every country (if not all of them, but I seriously doubt if there is any that doesn’t) in the world imposes income tax on its citizens in one way or other. The only purpose of enforcement of income tax is to generate revenue for the state.
Income tax as it is known to us today was introduced in 1798-99 for the first time in Britain by William Pitt the younger, so that to support costs of Napoleonic wars. This initial income tax levied 0.8333 percent on incomes over £60 and 2 percent onto incomes over £200. It was hoped that this measure would raise £10 million but it fell short of target and actual tax collected only totalled around £6 million. The tax was later repealed in 1816. Its opponents argued that such a tax should only be imposed to finance wars; they further wanted all records of tax burnt along with its repeal. Due to this all records of tax were publically burnt although copies were retained. In US income tax was introduced in July 1861 where all incomes over $ 600 where charged at the rate of 3%. In this case as well this measure was adopted to finance Civil Wars. Later this idea was slowly and gradually adopted my others around the globe.
There are three main categories of income tax; progressive tax, proportional tax and regressive tax. Progressive taxation is generally followed taxation method all around the world. Under progressive taxation regime many income brackets are formed and higher income groups are levied higher tax rate while lower income groups are levied lower tax. By this method of taxation lower income groups are given protection by not imposing any tax at all onto them as they already have lesser income and even a small percentage can be very heavy upon them. While higher income groups who can afford to pay higher rate of tax are made to pay income tax at a higher rate.
Regressive taxation is the opposite of progressive taxation. In this taxation method poor people are made to pay more percentage of their income in tax while rich pay lesser percentage of their income in tax. This method of taxation is not followed anywhere in the world, because of its inherent injustice. On the other hand proportional taxation method levies flat tax on all citizens irrespective of their income. Proportional taxation although not very popular, still is followed by many countries especially Eastern Europe, Russia and Central Asia.
Sales tax or ad-valorem tax is a tax levied by the government on consumption. Generally known as GST (General Sales Tax) or VAT (Value Added Tax) sales tax is mostly charged as a percentage of prices. This tax generally increases the prices of these goods, total amount of tax being shared between consumer and seller or producer. The proportion of sharing of total amount of tax varies with products and markets depending upon various other economic factors.
Although Excise taxes were common in ancient world, but sales tax as we know it today is a relatively new idea. Multi-stage taxation was largely developed during First World War, but Value Added Tax was first implemented in France in 1958. This was taken up by other European Countries generally in order to harmonize taxation system inside European Union. Today this is employed in over a 100 countries all over the world. Sales tax is a form of indirect taxation. But sales tax has a very dreadful history with governments being toppled and kings being killed since then. (For further reading on history of sales tax, click here)
Inherently sales tax is a regressive tax, implying people with from lower-income groups spending more percentage on tax that those from higher-income groups. There are generally two reasons for imposition of sales tax. Sales tax is either used by the state to generate revenues. In this case this tax is imposed on many items which in third world countries also include items of basic necessity like milk and bread. In this kind of taxation regime poor person naturally pays more percentage of his income in tax than the rich person, therefore it increases economic inequality and pushes more people below poverty line. Secondly, sales tax is also imposed on certain goods to discourage the use of them in which case items of basic necessity are exempted from tax. A particular example of such a measure is imposition of high sales tax on cigarettes and alcohol. What it does is that it increases the prices of those commodities onto which this tax is enforced, which makes the demand for them to decrease according to basic economic law of demand. Although its usefulness as to whether it does reduce the demand of goods such as alcohol is debatable, in which case only purpose of the tax can be to generate revenue for the government.
The problem with income tax is that it is inhibitive in nature, especially when percentage reaches very high it discourages the individual from wanting to earn more and thus to work more. For example, if in a certain tax regime lower threshold is $10,000 for tax. It would discourage an individual from wanting to earn more. If his basic needs are being fulfilled within this amount of money, why should he work more and then he would have to pay the tax as well? Secondly, income tax is indiscriminate of needs of person who is paying the tax. For example, if a person is earning more than a certain threshold he would be taxed at a fixed rate, whether or not he is able to fulfil his needs with this money or not. Needs of people vary from person to person and family to family. Some people might just have themselves to support while others may be supporting a large family. Although a general estimate of the population can be made but it would still at best be a ‘general estimate’ which is not bound to make everyone happy. But I believe that even if only one person is unable to fulfil his needs while is bound to pay the tax, it is unfair to him and his happiness should be as important as happiness of all the rest. Besides, why should he pay the money to the state when he cannot even support himself? Lastly, income tax I believe is unfair in itself. It looks like state looting people of their hard-earned money in a systematic way. Just assume if a person is levied a tax rate of 10% per annum, the state takes away his income of more than a month. That means he worked 36 days (1.2 month) in a year for the state while rest of the year for himself. He does not get the credit for his hard work of a whole month. Think of it when the rates go higher. 25% to 40% is a normal rate of income tax in today’s world, meaning 3 months and almost 5 months in a year of 12 months. I am sorry to say, but I tend to compare this to slavery, economic slavery. Someone working for half of the year for the state while half of it for himself, if this is isn’t slavery than what would be?
Whereas sales tax as already stated is a regressive tax. Unless used shrewdly only on those items whose use is deemed hazardous and dangerous and needs to be discouraged from using, sales tax is inherently unfair to a poor man. As already stated it is because poor person pays more percentage of his income in tax than a rich man, while poor man’s ability to pay tax is less than compared to a rich man.
In contrast with both income tax and savings tax, if savings are taxed it seems a lot more fare. This is because savings is that portion of wealth of a person which he didn’t need for a certain accounting period. If a person didn’t need a portion of his wealth, implying that it was over and above his needs, when state asks for a percentage of that wealth from him it seems a fair and would mean that only rich are taxed. Although this might encourage consumption-ism to a certain degree but even if it results in lower savings, this would mean that wealth is circulating in the economy and thus creating more jobs for people. This can also lead to a society with better distribution of wealth. A society where rich are taxed and poor are not, which the gap between rich and the poor is also that great.
Many would argue that such a move would reduce revenues of government and thus development. I think in a society where private sector does everything, the need for government’s revenue greatly diminishes unless it needs to fight wars. Besides there can be many other ways of taxation than income tax and sales tax, in which only rich are taxed and poor are exempted. Property tax and wealth tax are a few of the examples. Another line of argument can be that such a system is difficult to implement, but it should be kept in mind that in today’s recorded economies this step is not that difficult to take.