To tax or not to tax, is not the question. How to tax, is the real question! Or is it?

Advantages of taxing consumption over income:

Whether?a Tax on Consumption (CT) i.e. GST, is better than a tax on Income (IT) i.e. Income & corporate tax, depends upon the economic, social & policy perspectives, at the time of review, at any point in time, for any country

• Consumption tax (CT) over Income tax (IT): IT penalises earnings, reducing the incentive to work & therefore, save & invest. However, CT only applies when money is spent, encouraging saving & long-term investment
• Simplified taxation reduces costs of compliance: CT is easier to administer compared to complex IT codes, with deductions & exemptions. This reduces tax avoidance
• Broadening the tax base & achieving economic efficiency: IT offers exemptions, deductions & loopholes that reduce government revenue. CT applies to all spending, capturing more economic activity
• Fairer for high earners & business growth: High earners tend to save more, so CT implies they are taxed when they spend & not when they earn. In a similar fashion, businesses can reinvest, since profits aren not taxed immediately

Disadvantages of CT

• Regressive Impact on Lower-Income Groups: Lower-income households spend a higher percentage of their income on necessities, making consumption taxes more burdensome for them. Without exemptions or rebates, CT can disproportionately affect the poor
• Potential for Reduced Consumer Spending: A high CT can discourage spending, slowing down economic growth. If people delay purchases or seek tax-free alternatives i.e. cash transactions, cross-border shopping etc, tax collections will drop
• It is difficult to transition politically: Many societies are accustomed to IT & shifting to CT will face resistance akin to a ‘price rise’. Transitioning from IT to CT will require several adjustments to social programs & tax credits

Advantages of IT over CT:

• More progressive & equitable: IT can be structured progressively, ensuring that the wealthy pay a higher percentage of their earnings. This helps fund social programs & reduce income inequality
• Stable Revenue Source: People always earn income, but they may reduce spending during economic downturns. IT provides a more stable revenue stream for governments
• Direct taxation on ability to pay: IT is based on earnings rather than spending habits, which can be fairer for low-income individuals who need to spend a large portion of their income on necessities

Which is Better?

• For economic growth & investment: CT is preferable
• For fairness & reducing inequality: IT is better (assuming people declare their income)
• For simplicity & reducing tax evasion: CT wins
• For stable government revenue: IT is more reliable

My take:

• A hybrid approach i.e. lower IT combined with moderate CT, such as GST, with exemptions for essential commodities, is often seen as the best compromise
• However it will also raise questions on the size of government, governance, public sector investment, spending, public servants (employees) benefits, compensation & will seep in to VVIP & VIP privileges

The real question is who will bell this cat? I mean tax!

Note on a note:

• The highest denomination currency note ever printed by the Reserve Bank of India was the??10000?note in 1938
• This was demonetised in January 1946
• The ?10000 was again introduced in 1954
• These notes were demonetised in 1978