Why Income Taxes Should Be Abolished?

Income taxes are a subject of great debate all across the world. There are many who believe that the rich should be made to pay as much tax as possible. On the other hand, there is another lobby which believes that the income tax on the rich should be the minimum since they are the people who create jobs and help increase employment as well the general level of economic activity in the nation.

Recently, Alexandria Ocasio- Cortez, who is an upcoming politician from the Democratic party, brought up the idea that people who make upwards of $10 million should be taxed at 70%! This comment once again sparked the never-ending debate of what the highest tax rate should be. At the present moment, the top tax rate is close to 35%. Doubling the same is likely to cause a mass exodus of high earning individuals from the United States.

In this article, we will try to make a case for the abolition of income taxes. Since no taxes need to be paid, the question of the top rate would not arise. Here are some of the common reasons that are quoted when the issue of abolition of income taxes is raised.

Prevents Shenanigans

Income taxes are charged on the income that individuals or corporations declare to their respective governments. This means that if they could somehow lower the income that they declare, they could also lower the amount of tax paid. This is the reason why many people and corporations indulge in illegal behaviour in order to lower their tax payment. It is a known fact that companies maintain several books of accounts.

Similarly, many individuals wilfully omit their income from tax returns. Their sole purpose behind doing so is an evasion of tax. It would, therefore, be fair to say that the current taxation system is wasteful as it encourages people and corporations to engage in tax avoidance. It should, therefore, be replaced with a system where tax avoidance isn’t really an option.

Encourages Hard Work

An income tax is a tax on the income generated by a person. Hence, an escalating income tax makes it appear as if making a higher income was some kind of an offence that people need to pay for! The fact of the matter is that it is this allure of higher income that makes industry thrive in the United States of America. Hence, imposing prohibitive tax rates on high-income earners only makes the problem worse.

There should not be a tax on earning money. There could be a higher tax on spending money. For instance, luxury houses and luxury cars brought by the rich should have very high tax rates. Unlike, income tax, progressive indirect taxes cannot be easily avoided. Anyone who buys a luxury house will have to pay the tax.

Easier To Collect

The government gains very little when it comes to direct taxes. This is because it needs to set up an elaborate infrastructure in order to collect these taxes. Also, since there is a lot of tax evasion, this collection infrastructure needs to employ a lot of people and also a lot of technology. As a result, the net collection, i.e. the income minus expenses is quite low.

On the other hand, indirect taxes are pretty easy to collect. This is because most of the onus of collection lies on the manufacturers and sell which sell the product. The government does not have to employ too many people since evading indirect taxes is much more difficult as compared to evading direct taxes. Hence, the net tax collection is higher in the case of indirect taxes. In simple words, it means that there are fewer overheads to collecting indirect tax which is the reason why the government should rely more on them.

Reduces Lobbying

Direct taxes are the reason why a lot of lobbying takes place in Washington and other capitals of the world. This is because direct tax laws can have exemptions built into them. The rich lobby the government so that their industry or business can be given special tax status. As a result, their competition will have to pay tax but they will not. This will give them a competitive edge.

If direct taxes are removed, then this lobbying and political manoeuvring can be greatly reduced. Since lobbying is an inherently wasteful expense, reducing lobbying will be beneficial to the economy.

Public Behaviour Can Be Influenced

Indirect taxes can also influence public behaviour very easily. In fact, many governments all over the world are already using this strategy. If the government wants to discourage the consumption of fuel, it can increase the indirect taxes on fuel. Similarly, the government could levy high taxes on goods such as alcohol, nicotine, firearms, and gambling. This would discourage more people from buying these products.

It is a myth that indirect taxes hurt the lower class disproportionately. If high indirect taxes are levied on items which are used by the rich, then the indirect tax will be paid by them. For instance, a 100% tax on Rolls Royce cars is unlikely to be paid by people from the lower and middle-income groups.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.