A tax on earnings is a tax on income whether it be salary, inheritance, or profits from investments. This is often contrasted with a consumption tax, where taxes are imposed on those goods and services that are consumed. Some argue that consumption tax is more logical, since it is argued that people who earn more would reasonably spend more, making the tax structure more equitable. Others argue that there's no guarantee of this, however, and that a consumption tax would cause consumer prices to rise significantly.
The advantages of imposing a tax on earnings can include the following:
- People are taxed based on total income, so people who make less theoretically pay less.
- Not all people consume at the same rate, therefore tax on earnings is a more equitable way of assessing tax than with a consumption tax.
- People with lower incomes would be the most affected by a straight tax on consumption, since even necessary items like cars would be significantly more expensive.
- Income is an easier way to levy taxes and decide deductions. While people may deal with a few pay stubs they have to save, in consumption tax, people might have to save receipts for every purchase they made during a year in order to qualify for tax breaks.
This type of tax also has some disadvantages:
- Tax collection is generally thought to more difficult than a consumption tax, which would be levied at the point of sale.
- For the those in the middle class and lower classes, an earnings tax may be a financial hardship, regardless of the amount.
- Some believe that income tax is a violation of a citizen's individual freedom. They argue that it violates the individual’s right to decide how to use the money he earns.
- People paid “under the table” may be able to evade paying any income taxes.
Both methods of taxation are in use in the United States. Most states and many cities impose a consumption or sales taxes on certain items. Many also require people to pay state income tax, as does the federal government. This leads to the claim that US citizens are disproportionately taxed according to where they live, be it state to state, county to county, or rural versus urban areas. Those who claim that this is a disadvantage of the current system believe that it would be best to have one system in place that assesses taxation more equitably.
An idea that has been garnering increasing support is called FairTax. This would be similar to consumption tax, and some feel it would not only benefit individuals but also corporations. In this plan, people would pay a 23% tax on purchases of most goods and services, often excluding food. When added to state sales taxes, this would, increase taxes on purchases to about 30% in most cases. Some proponents argue that this method would lower prices and make production less expensive. Others say that the middle class would bear the burden of the majority of taxes under FairTax.
The method of taxation is a complex one that requires extraordinary scrutiny. Any change to the method of taxation in the US would require Congressional approval and possibly constitutional amendments.