VAT, flat and progressive taxation
Pros of VAT tax
The distribution of income to a few wealthy people increases the income generated by the economy. This is because the few wealthy people are able to invest in large scale investments. This reduces the cost of production due to economies of scale and in creases the income of the people (Tanzi, 1995).
VAT tax system ensures that all people in the economy pay tax. People who consume products from the country pay the tax. Even people who deal in illegal businesses pay the tax. The chances of escaping or avoiding the tax are minimized (Ely, 2008).
An efficient VAT tax system generates a large amount of income to the treasury. All goods consumed within the country as well as the exports have a VAT tax included in their value. Governments use this tax system to create more income (Kato, 2003).
VAT tax system encourages savings more than consumption. The wealthy can save more money nor use it to invest in real estates. The low income earners are also discouraged from spending a lot of money on consumption. This increases the savings of a country. Therefore, the country generates a lot of income from the system (Ely, 2008).
Cons of VAT tax
VAT is a regressive tax which creates a bigger burden to the poor and favors the wealthy. A wealthy person spends a small portion of his income, for example, a person earning one million dollars per year may spend five percent of hisher income. On the other hand, a person earning ten thousand dollars per year spends the entire income. This creates an imbalance on the contribution of the tax payers to the tax kitty (Ely, 2008).
VAT tax collection has become costly for the government to collect. Many people are evading the tax and the government spends a lot of money chasing after the evaders. The income collected from the VAT tax is becoming less than the costs of collecting it (Williams, 1993).
VAT tax system is complicated. This makes fraud easier since people can escape or avoid it easily. Changing from VAT tax to other tax systems is complicated. On the other hand, changing from other tax systems to VAT is also complicated and creates a huge burden to the auditing industry to set up the auditing systems (Ely, 2008).
Flat tax
This is a tax system that offers a constant rate of tax to all people. It is not a progressive tax since there are no differences in the amount of tax paid by the different income groups. The tax system does not tax the low income groups (Kato, 2003).
Pros of flat tax
It is simple since all income groups pay the same amount of tax. The mode of collecting the tax is simple and does not create loopholes for escaping or evading tax. The tax payers are aware of the amounts they are supposed to pay since computation of the tax is simple (Tanzi, 1995).
The costs of collecting flat taxes are low since minimum procedures are involved in the process of collecting the tax. This makes it more economical to the government to administer. Compared to other tax systems, flat tax is the least costly to administer (Williams, 1993).
Cons of flat tax
It is not fair since the wealthy pay the same amount as the poor. A fair tax system should differentiate between the rich and the poor since all people do not have equal incomes. The distribution of the tax is not fair since the wealthy pay less than they are supposed to pay. The poor contribute more than their taxable capacity (Tanzi, 1995).
Progressive tax systems
This is a tax system that gives an increasing tax rate as the income increases. The wealthy pay more while the poor pay less. Different tax rates are designed to fit the different income categories. There is a minimum income below which a person is not taxed. This reduces the tax burden to the poor people. The system attempts to distribute the tax according to the ability-to-pay basis. The revenue authorities give tax rates for the different income groups (Tanzi, 1995).
Pros of progressive tax
Fairness in taxation is achieved through the progressive tax system. The wealthy pay more since they have the capacity to pay tax. The low income earners pay less since they have a lower tax able capacity. High income earners do not pay tax on the entire income. Certain incomes are taxed the same no matter the amount of income, for example, income above a certain amount is taxed at given rate (Ely, 2008).
The people who benefit more from government services pay more tax. This increases the canon of fairness. The poor benefit a lot from the government services and are required to contribute a larger amount to the tax revenues. The wealthy benefit less from the government services and hence contributes less amount of tax. This ensures an equal distribution of tax burden (Williams, 1993).
Progressive tax encourages savings and investment since the wealthy are taxed less. They are able to invest the savings from the tax. This increases the GDP to the country and boosts the economy (Kato, 2003).
Cons of progressive tax
The system of administering progressive tax is complex. This creates loopholes for people to evade and avoid tax. The taxpayer is required to understand the different rates for the different income groups. This may become complicated and hard to understand (Williams, 1993).
The tax system requires a large workforce to collect taxes. This creates extra costs of collecting the tax and may reduce the profits of the taxes. Tax auditors and tax collecting agencies increase the costs through the salaries paid to them (Kato, 2003).