Income tax and Consumption tax
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Very basically income tax is a tax deducted from your paychecks. If you’re self employed or a freelancer the taxes levied will be due by April based on your rate based on income from the previous year ended at the end of December. A consumption tax is something paid for goods purchased. Every time you put gas in your car a portion of the per a gallon rate you pay is a consumption tax. Sales taxes I believe are a consumption tax. They are collected by the merchant or vendor at the time of purchase, and then they pay those collected taxes to whatever relevant government agency. I think consumption taxes are usually state taxes.
Well we use roads don’t we and we need an army to fight off bad people , how do they get paid – well we all put in some money and it pays for it all.
If a poor person pays some money then a rich person pays the same amount then it’s not fair as the poor person seems to be paying more
So we all give what we can afford ( a % of our pay)
Sometimes the roads and army cost more so we get more money from items that are sold in shops
Assume there are two countries, country A and country B. Both have the same currency, and your salary is $100,000 in both countries. Everything else is the same except their tax systems.
Country A has income tax of 20% and there is no consumption tax. You pay your tax, then you have $80,000 after tax to spend on ice cream each week, and your weekly ice cream shop cost $500 at the store. The ice cream man takes all of that $500.
Country B has no income tax, but has a consumption tax on ice cream of 20%. Your income doesn’t get reduced from tax, so you have $100,000 to spend on ice cream. Because there’s a 20% consumption tax however, ice cream costs $600 and the government gets paid each week when you buy ice cream. From the $600, the ice cream man takes his $500 (the same as country A) and the government takes the additional $100 as the tax revenue on consumption.
This is super simplified of course, but it shows how tax revenue is collected under both schemes and how the individual’s disposable income and cost of goods in country A and country B differs.
The key difference is income taxes can be banded and are typically progressive.
Consumption taxes can be used to incentivise and disincentive consumption of different goods and services by having different rates. They are typically regressive. Poorer people typically spend relatively more of their income on fuel. A fuel levy (or sales tax) would hurt them more.
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