Income Tax and Consumption

Income Tax and Consumption Tax
Name
Institution
Income Tax and Consumption Tax
In my opinion, I feel that applying consumption tax and lowering income tax would broaden the tax base. Ideally, when looking at income tax, it only applies to those individuals who report personal income whereas incomes generated from other unregistered activities are not submitted. For instance, the government is unable to collect tax from events such as gambling or prostitution. Also, people, who receive cash as instantly payment do not report their earnings. Well, poor people may end up paying a significant portion of their earning compared to affluent individuals, although the wealthy persons spend more and pay as they consume. Income tax system is imposed on individuals basing on their level of income. However, not all citizens have constant income flow that can be taxed and still there are those whose income is below the lower limit. When for instance the limit gets reduced, more people would be taxed, but consequently, it would induce the tax burden on many citizens.
A well-designed consumption tax system seems to be neutral as it may have no effects on the allocation of resources, unlike a dramatical income tax. The tax would be assessed only on income consumed for instance spending on goods or services but not taxing saving. Consumption tax system would increase the overall tax base as even the illegal business or individuals who are illegally in a country gets imposed (Freund & Gagnon, 2017).

Everyone is taxed under consumption tax unlike with the income taxing system which applies to employed. Theoretically, during a transaction, even illegal cash would be taxed and thus help shore up shortfalls of budget observed of late. When individuals are taxed on their incomes, less money is left for their budget, and such citizens end up spending less. Therefore, if the consumption tax is exercised it would encourage productivity thus tempting individuals to spend on various goods and services, consequently widening the tax base
Reference
Freund, C., & Gagnon, J. (2017). Effects of Consumption Taxes on Real Exchange Rates and Trade Balances.