Income Tax Help

Income tax is a tax on the total amount of net income an individual receives whether it is from wages, inheritance, or from gains on investments. Often this is compared to a consumption tax, which are like sales taxes and taxes generated when people buy specific goods like alcohol or tobacco. Some people argue that the consumption tax is a much better way to go about taxing as opposed to taxing total earning. They argue this because people that earn more spend more. This is incorrect and will be disputed in this article.

The benefits of taxing total earnings far outnumber the consumer tax advocates arguments. People who earn more do not necessarily spend more. This is a generalization and just isn’t correct. One advantage of the income tax is that people who make less have to pay less in tax. Even if they consume the same as a rich person, if the rich person is really a hoarder should they have to pay the same in taxes? That just seems terribly unfair. Another point to think about is that two rich people with the same incomes may not consume the same. For instance one rich person may have simple tastes and not spend very much of his income, and on the other hand you may have a person with equal amount of wealth and income who has very unique and lavish tastes and spends almost all of their income.

Another argument against the consumption tax is that it would affect lower income and middle class people more than people with higher incomes. This is evident once you look at how much the cost of necessities would increase by whatever the consumption tax rate was set at. Rich people and poor people really have the same necessities whether it is food, water, shelter, transportation, and any number of other things people cannot live without in today’s society. Now it is true that people with higher incomes as a majority do spend more on the necessities as they have higher standards than people with lower incomes, but as the example above illustrated it is not always that way. There are many people in society that have millions in the bank and investments, and you would never even know it because they drive an old pickup or a beat up car and dress no different than someone with a lower income.

Another reason that the income tax is a much better way of taxing than the consumption tax is that it makes it much easier to keep track of taxes. In a consumption tax society the people might have to save every receipt for certain purchases in order to get back any return on the taxes they spend or to qualify for tax breaks. It is much easier to use the system already in place than for the government to spend the tax payer’s money to implement a new less efficient system.

Income is a simpler way to determine taxation and deductions. While people may deal with savings a few pay stubs and collecting a receipt on interest earned from investments like they currently have under a tax-on-earnings system. In a consumption tax system people would have to save receipts for every purchase they made during a year and keep track of every time they spent money and what they spent it on in order to qualify for certain refunds and tax breaks.

Although there is some disadvantages to the income tax system. It is generally accepted that a tax on earning system is quite more complicated than just a point of sale tax. Also many people argue, especially libertarians, that a tax-on-earnings is a violation of individual liberty and freedom. They say that the government does not have a right to tax individuals based on net earnings because it limits how much they can spend. One last disadvantage of the income tax is that many people who get paid in cash do not pay an income tax and they can successfully evade paying any taxes at all. That would not be able to take place in a consumption tax system. The only people that could evade taxes in that system are those that never purchased anything. Even if they purchase a lot one year and stock up so they don’t have to purchase anything next year the only benefit they could receive from doing this is if the consumption tax rate went up the following year, but if tax rate went down the next year they would have paid more. Either way it is highly unlikely that anyone would make this gamble to try to pay less in taxes, and it isn’t feasible to just not purchase anything for an entire year in the world we live in today.

Regardless of what system of taxation you argue for both methods are currently in use today. Most local government agencies impose a sales tax on goods and services sold in their jurisdiction. Then the federal government taxes the incomes people make from generating those goods. Neither form of taxation has given the governments enough revenue in the past decade. The people who make the most in this country pay much more in taxes than those who don’t make very much.

As a result of the complexity of taxation and the tax code many people argue for a flat-tax. Where everyone pays the same percentage of taxes regardless of how much income they make. This system also has its pros and cons.

Only one thing can be certain when discussing taxation and that is that there are a multitude of opinions and reasons people came to that opinion.  There are very intelligent economists who have the same credentials and experience who completely disagree on which system would have the least harmful effects or most beneficial effects for the country as a whole.  Perhaps only time and history will tell humanity what form of taxation is best or perhaps no taxation could somehow become the law of the land as many economists of the Austrian school of economics have argued.

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Tags: Income Tax Help, IRS, Money Back, Money Help, Paying Taxes, Tax Breaks, Tax Expert, Tax Questions

This entry was posted on Sunday, February 12th, 2012 at 9:13 pm and is filed under Tax Tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.