It’s a perennial debate. How can we eliminate income tax? Only a handful of countries around the world have no income tax. Most are the wealthy, oil-rich nations of the Middle East and the others are infamous tax havens, such as Monaco and Bermuda. Not every country can afford to do away with income tax, especially nations with a large working population.
There have been many proposals aimed at replacing personal income tax by taxing consumption rather than income. As far back as 1998, many politicians in the US proposed a higher general sales tax to replace and compensate for the personal, corporate income taxes, and estate tax. A group called Americans for Fair Taxation launched a multimillion-dollar campaign to promote the idea with what they claimed would be a 23 percent sales tax. These proposals would have taxed almost all private consumption and all government expenditures.
It’s not like the United States is the only country to have pondered over this concept. Many countries have introduced a broad-based Value Added Tax (VAT) or General Sales Tax (GST) and raised it to reduce the tax burden on individuals. For example, in 2010, New Zealand raised its GST rate from 12.5% to 15% while lowering income tax rates for lower-income taxpayers. To pacify larger businesses, corporate tax was also reduced from 30% to 28% the following year. The tiny nation of Singapore increased the rate of GST from 3% to 7% percent over the years. But during the same period, the top marginal personal income tax rate was cut by from 30% to 20% and the corporate tax rate was nearly halved from 33% to 17%.
GST is levied on retail sales of goods or services, which occurs when businesses sell to households or the end-user of such goods. Business-to-business transactions are not considered retail sales because the purchase is used as an input, not as end use consumption. But one of the challenges with a wider implementation of GST is taxing services in an ever-increasing changing economy.
Determining the appropriate GST rate can be tricky at a national level. With the absence or removal of federal income taxes, states would have to convert their own income taxes to sales taxes and conform closely to the federal tax base. Instead of one flat GST, some senators have proposed higher sales tax on luxury goods, while necessities are taxed less — or look at other methods of taxation, such levying a small tax on all electronic bank payments.
A GST rate increase would also have to factor in the possible increase in tax evasion and tax avoidance too, but more importantly, the overall impact on economic growth.
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