10 Reasons to Abolish Income Tax and Replace it With a Consumption Tax
The holidays are over and the New Year has just begun. Everyone is excited about all of the wonderful opportunities to come, expect for one.
There are not too many people who get overly excited at the prospect of tax season. Often, it is a long and daunting process that yields little to no reward. By law, individuals and corporations of all shapes and sizes are required to fill out and submit an income tax form to file with their accountant. Income tax is a tax that is placed on all personal income. For instance, if you look at your paycheck, you will probably notice that a sizeable amount has been deducted as income tax. When you file your taxes at the end of the year with your accounting specialist, he or she will tell you if you need to pay additional income tax or if you are eligible for an income tax refund. Let’s face it; no one likes to be told that they owe more money to the Government when they have been working hard and paying diligently all year long!
For many, income tax is inefficient and unnecessary. Considering how the system is set up in the United States today, it would benefit the general population to abolish income tax and replace it with a consumption tax. While no one looks forward to tax season, this would make everyone’s experience a little bit brighter in the years to come.
10By Abolishing Income Tax, the IRS Would Likely be Eliminated
If the Government were to eliminate federal income tax, it would eradicate the need for the IRS. While there are people who may argue that the IRS is a valuable entity, there are those who undoubtedly disagree.
The IRS stands the Internal Revenue Service, which is the world’s largest tax administrator. It is a division of the Department of Treasury and is responsible for collecting and processing millions of tax returns each year. The creation of the IRS dates back to 1862 when President Lincoln decided to enact a measure that would help raise revenue for Civil War expenses. Although the income tax was repealed just ten years later, it made its way back into the lives of all Americans in 1913 when it was permanently amended to the United States Constitution.
Since then, all Americans have been paying income tax on their hard earned money and have been tied to the IRS in some way, shape, or form while doing so. Many think that the IRS is inefficient. Others are scared of the IRS. They are frightened by the notion of getting audited or called out on their tax performance. They are afraid that if they miscalculate something or don’t file correctly that the IRS will come after them. While the IRS may not be the most efficient system in the world, it does help process and complete millions of tax returns each year. Without an income tax, however, there would be little to no need for such a large entity to assume this responsibility.
9Everyone Would Have More Money
In theory, if income tax was abolished and a consumption tax was put into its place, people would have more money.
So, how would this benefit society? Some say that if people had more money in their wallets, they would have more money to spend. More spending means greater economic development. Not only would this help to generate growth for a somewhat stagnant economy, but it would also allow people to invest in their future. With more money in their pockets, they would not only be able to pay for their cost of living, but also set money aside for retirement, their child’s education, and their family, as well.
On average, by abolishing income tax, it is projected that families would have about 30% more income each year. Those who are currently struggling would be able to handle their everyday expenses with ease. Single parent households wouldn’t have to struggle to find the balance between work and caring for their families. Without an income tax, they would be able to use their hard earned money to not only pay their living expenses but to adequately afford daycare for their children so that they can work without having to worry.
Let’s face it, if the income tax was abolished and a consumption tax was put in its place, it would stimulate the economy ten-fold. People would work just as hard to earn their money but would be able to truly reap the benefits. They would be able to save more, as well as spend more, which would do wonders for the economy as a whole.
8The Government Would be More Thoughtful with Spending
If Federal income tax were abolished and a consumption tax was enforced, it would likely make the United States Government more thoughtful in their spending of Federal tax dollars.
Have you ever filed your taxes at the end of the year and realized just how much money you have given to the U.S. Government over the course of the year? With each paycheck, there are standard deductions that are subtracted from your wages. Rather than going home with you, these dollars are given directly to the Federal Government to pay for things like the military, Medicare, Medicaid, transportation, and more. The Government doesn’t generate its money over the course of the year. It funds Federal programs directly through taxpayer dollars.
While this is an excellent way to make sure our roads are taken care of and that our national security is as robust as it can be is this really where your tax dollars are going? In 2013, for instance, the Government used about 62% of federal funds to support mandatory programs. It used the other 31% to fund what they call ‘discretionary’ items, such as community education and health benefits. How do you know that your money is being used to support our troops instead of being used to purchase office supplies?
If the income tax were abolished, you wouldn’t have to worry about how the Government was spending your money because it would no longer matter. Instead, you would be able to spend your money without doubting where it was going.
7It Would Help to Eliminate Illegal Activities
Abolishing the Federal income tax and replacing it with a consumption tax would also help to eliminate, or significantly reduce, illegal activities.
Take a moment to think about all of those people you know who work ‘under the table.’ These are individuals who take cash-only jobs that are not considered on the books by the IRS. Whatever money they earn is theirs, free and clear. They don’t have to pay an income tax on that money because it is not documented as real employment in the system. While this certainly sounds like a good situation to be in, it is also considered an illegal action.
So, what happens if you get caught working under the table? If the IRS can prove that you have been collecting income without paying taxes on your wages, it can retroactively charge you for any money due to the Government. This can add up! Not only this, but it can also bring to light other issues that would require legal counsel, such as illegal immigration or pending credit obligations. Also, if you are not paying towards Social Security or Medicare, you are not contributing to your future care.
Those who peddle drugs on the street or engage in other illegal activities, such as working under the table, would be less likely to do so if Federal income tax was abolished. People would no longer have to pay out their earnings to the Government or turn to inappropriate and illegal methods to adequately provide for their families.
6Income Tax Disproportionately Effects the Middle and Low Classes
In truth, the United States tax system only serves to generate inequality among the people, versus creating equality.
When you take a look at our country from a more global economic perspective, you can see that it is highly disproportionate. In 2015, for instance, it was noted that approximately 49.9 percent of all households in the United States are considered ‘middle class‘ households, meaning that they earn middle, or average, incomes. About 29 percent belong to low-income families, who live at or below the Federal poverty line, and 21 percent belong to upper-class households.
As the year’s pass, the middle class continues to shrink. With rising prices across the country, more and more families are falling into the lower income bracket. When you look at income tax, income tax only serves to further damage middle and lower class families. While the wealthy certainly pay a higher portion of income tax on their income, the average rate is still considered much too low by many. Take, for instance, the CEO of Dell. As one of the wealthiest individuals in the world, he earned approximately 40 million dollars in 2005. He paid about 2.5 million dollars in income tax that same year. For someone who is that wealthy, that is merely just a drop in the bucket! For those who are already struggling to make ends meet, however, this money is anything but a small drop.
With a consumption tax, people would be allowed to keep what they earn. They would also be able to invest back into the economy based on their direct needs and desires. The whole system would be much more equitable for all, as taxes wouldn’t be based on how much money someone earned, but rather on how much an item, in particular, was worth.
5Consumption Tax Protects the Poor
While many would argue this claim, there are those who would go as far as saying that a use tax, or national sales tax, would serve to protect the poor.
As mentioned above, Federal income tax tends to favor the wealthy. While the rich are indeed taxed at a much higher rate, many would argue that the rate isn’t high enough. Most billionaires don’t feel the effects of a few million being paid back to the Government each year. For them, it is simply a drop in the bucket. For all of the middle and low-class families, however, any wages that are given to the Government are felt by the entire family.
So, how would a consumption tax help to protect the poor? Let’s imagine that a consumption tax, or national sales tax, is placed on all items, both large and small. Larger, more expensive items would be taxed at a higher rate, while smaller, less expensive items would be taxed at a lower rate. While the poor would still be taxed on every item they purchased, one can assume that they would only be purchasing items that they need to survive and that those items, in the grand scheme of things, would be fairly small.
The wealthy, however, would most likely be spending money on more lavish purchases and would be paying more in taxes by doing so. While they would not be taxed at a different rate, per say, they would most likely be spending more in taxes each year and contributing more to Government spending that those who didn’t have as much to spend. Low-income families would be able to keep what they earn and allocate their spending accordingly.
4Government Compliance Costs Would be Significantly Reduced
A compliance cost refers to the amount of time or money it takes to conform to Government regulations. When it comes to our tax system in the United States, compliance costs are quite substantial. If the United States Government were to replace the income tax with a consumption tax, compliance costs would inevitably diminish.
Let’s take a look at this past year, for instance. In 2016 alone, it is estimated that tax compliance cost the U.S. Government approximately $409 billion dollars! That is a significant amount of money. Can you imagine what can be done with that money if it wasn’t being used for compliance purposes?
If the United States Government were to abolish the income tax and replace it with a consumption tax, it would significantly decrease compliance costs across the board. In addition to the financial aspect, it would also save a whole lot of time. Rather than spending more than 8.9 billion hours trying to comply with IRS requirements (as cited in 2016), Americans would have more time and more money to invest in other areas of our economy.
With the current system, these numbers continue to grow. Year after year, the tax codes become more complex, and it takes more time and money to ensure full compliance with IRS regulations. Wouldn’t it be so much simpler to abolish the income tax and replace it with a consumption tax to save both time and money?
3A Consumption Tax Would Lead to Greater Visibility
Let’s consider for a moment your individual income tax. Over the course of a year, you make a certain amount of dollars. Of these wages, a certain amount is taken out through an income tax. Many of us probably don’t keep track of how much we are being taxed until tax season rolls around. For many of us, it is automatic. It is not something we typically think about until it comes time to either secure a rebate or pay out more to the Government.
With a consumption tax, however, it would be virtually impossible not to know how much you are being taxed or how much you are spending. Also, you would know exactly where your money was going at the time of purchase. No more wondering about where your tax dollars are being allocated once they reach the hands of the nation’s political leaders.
With a consumption tax, every item, from a Slurpee to a motor vehicle, would be taxed. This tax would be printed right on your receipt at the time of purchase. Rather than spending countless hours with an accountant trying to figure out how much money you paid out or owe to the Government, a consumption tax would provide greater visibility with regards to spending. In addition to knowing and understanding how much you are spending on any given item, you would most likely become more aware of your spending habits, as well. In turn, you may think twice about purchasing something before you take the chance.
2Consumption Tax Would Help National Savings Rate
If the United States government were to abolish the income tax and implement a consumption tax, it would push people to not only spend more thoughtfully but to save more, as well. If people thought twice about what they were buying before they bought it, they would be able to, in theory, save more money than they do with taxable income alone.
The national savings rate is defined as the amount of money, throughout the country, that is not spent. It is calculated by measuring the difference between personal income and personal consumption. This is done by the Commerce Department’s Bureau of Economic Analysis.
Putting money into savings is important because it allows people to prepare for emergency situations, as well as adequately equip them for their future. If people are being taxed on their income by the U.S. Government and don’t have much extra money to spend, they certainly don’t have much leftover to save. Nowadays, people are trying their hardest just to provide for their families with the income they can secure, let alone setting aside savings. The money needed now is often more important than the money needed in the future.
By abolishing the Federal income tax, the U.S. Government would allow people to keep what they earn. If they were to implement a consumption tax, people would only be taxed on their direct purchases. Therefore, more money earned and less money spent equals more money to invest into a savings account.
1Income Tax Reduces Work Value
Another aspect to consider throughout this argument is the effect a federal income tax has on a person’s work ethic and the value of the work that they perform.
Let’s say that you have an individual who makes $10 an hour at his job. With an income tax, his money is decreased to approximately eight dollars per hour. This means that for every hour worked, he is making less money but is doing the same job. What is the incentive for him to perform the same quality work if he knows that he is making two dollars less per hour? That means that to gross the same amount of income, he would have to work more hours in a month, therefore spending more of his time at work and less of his time with his family and friends.
With a consumption tax, on the other hand, that man’s wages would remain unaffected. He would still be going to work and making $10 per hour. Not only would he be working fewer hours, but now he would be taking home every dollar he rightfully earned. Even if he is taxed at spending, he can decide what, and if, he makes a purchase and spends his money.
The United States tax system was put in place to generate money for the government in order to support several important federal programs. On its own, the government does not generate any real revenue. Rather, it relies on taxpayers to support such programs through their taxable wages.
Over the years, our current tax system has fallen prey to much discussion. There are those who claim that the current system is inefficient, old, and in need of a major revision. Those who argue against it, however, cite that it would be tough to eliminate the income tax and replace it with another tax that could generate money without wreaking havoc on our society.
There are reasons to support both claims. It is becoming more apparent, however, that it is time to make a change. Abolishing the federal income tax and replacing it with a consumption tax could be the change the U.S. tax system needs. By abolishing the federal income tax, the government would allow wage workers to keep their hard earned income. It would also perpetuate a greater level of fairness between social classes. A consumption tax plan may not be perfect, but it is a more viable and favorable option for the American people than the age-old income tax plan.