I was recently discussing income taxes with someone on TikTok, and they said that we shouldn’t have any income taxes at all: we should have consumption taxes instead.
Here’s why consumption taxes (also known as sales taxes) aren’t better than income taxes.
First of all, consumption taxes aren’t any more efficient than income taxes at funding public services.
Paying a tax when you buy a car isn’t a better way to fund a fire department, for example, than having taxes taken off one’s paycheque. Paying a tax when you buy a chocolate bar and a pop isn’t a better way to pay for a new elementary school than having taxes taken off one’s paycheque.
And since you’d have to redistribute the taxes collected anyhow (from taxed services to non-taxed services), there’s no benefit in that regard with a consumption tax over an income tax.
Second, consumption taxes disproportionately affect low income workers than those who are higher income.
Low income workers are more likely to spend all their income, which means a larger portion of their income will go toward consumption taxes, compared to people with higher incomes.
And while it’s true that everyone pays the same consumption tax rate (for example, the same 5% GST), having to pay that rate on all your income—functionally speaking, since you’d be spending all your income as a low income worker—rather than only a portion of it means more of your income would be taxed.
Finally, consumption taxes are less likely to affect rich people.
Just as low income workers are more likely to spend all their money, rich people are more likely to hoard their money, which means a significant portion of their money may never actually be taxed if the only source of taxation was a consumption tax. And given that rich people place a greater demand on public services—educated and healthy workers, infrastructure, protective services, utilities, and so on—than low-wage workers do, it’s unfair for them to not have to pay for the services that subsidized the creation of their wealth.
This is why income tax is a better option than consumption taxes. Even so, this is also why a flat tax is a bad idea for income tax, particularly the second and third points. A flat income tax—where everyone pays the same rate—overburdens low-wage workers.
Income tax should be progressive, with higher rates for the higher income brackets. Given that rich people place a greater demand on the public services that subsidize the production of their wealth, they should have to pay more in taxes (both absolutely and proportionately) than low-income workers.
This is also why there should be a wealth tax. When rich people hoard wealth instead of distributing it to the workers who generated that wealth, it doesn’t circulate in the economy. When money isn’t circulating in the economy, it’s not generating tax revenue. So not only does it rob workers of income, it robs the public of adequate public services (in quality, accessibility, or both). This is particularly the case when that wealth is invested to create even more wealth.
I’m not opposed to a consumption tax, per se, but it can’t be the only taxation source. And even if it isn’t, it must have exemptions for the types of goods and services that low-wage workers normally purchase, and it must have annual income-based rebates to minimize the impact on low-wage workers.