Income tax and Consumption tax
In: 5
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.
Latest Answers