Public financing is a complex practice that determines how governments and other public institutions generate and spend finances over a given time frame. Income tax is imposed on the income generated by individuals or institutions within a given or controlled jurisdiction (Avi-Yonah and Fishbien, 2020). Income tax targets earners and not spenders, which results in inequality and could discourage people from working in the formal sector. Consumption tax is imposed on the purchase of goods and services. It implies that the biggest spenders are also the biggest taxpayers. In this case, the taxation system generates revenue based on how much they spend or consume and do not earn. While most states tax people based on how much they add to the economy, the approach poses several disadvantages to the system.
Consumption tax comes in forms such as value-added and retail tax. The consumption tax system allows the government to tax all social classes irrespective of purchasing power. Unlike the income tax, where the target population is low, focusing on the consumption tax gives the government access to all people, increasing revenues (Avi-Yonah and Fishbien, 2020). The income tax system is often considered unfair as most people think the rich pay little tax on their wealth and earnings. The notion could discourage people from working, reducing the revenues generated via income tax. With the elimination of the income tax system, people are encouraged to work harder and earn more. Consequently, the consumption rate goes higher, and governments can collect more revenue.
During mastering public administration, I have learned that government policies impact economic growth and the general cost of living. Tax systems are some of the most influential policies that must be formulated with the interests of the public in mind. When the general public flourishes in income and consumption rate, the government is better placed to generate more revenue. Hence better services are rendered to the people. On the contrary, bad tax policies reduce government revenue resulting in high costs and poor living standards.
Reference
Avi-Yonah, R., & Fishbien, N. (2020). The digital consumption tax.Intertax, 48(5). Web.