Expense tax replaces income tax and is based on spending rate rather than earned income. Issues include equal distribution, collection methods, brackets, and rates. Two calculation methods are cash flow and exempt income. Tax credits are needed for family circumstances and age. The main benefit is the removal of double taxation, but the disadvantage is a shift towards leisure over work.
Expense tax is a taxation plan that replaces income tax. Rather than applying a tax based on earned income, tax is allocated based on the spending rate. This is different from a sales tax, which is imposed at the time the goods or services are provided and is considered a consumption tax.
There are four basic issues surrounding an expenditure tax: equal distribution between rich and poor, methods of collection, brackets and rates. The most obvious issue in this model is the gap between disposable income and spending. The lower the income, the more of that income is spent on meeting daily needs. Saving is a luxury that is only possible after all spending needs are met. This model would have the rich, who have more disposable income to save and thus protect themselves from taxes, than the poor and working classes. To address this issue, adjustment mechanisms would need to be built into the tax reporting process for people with lower incomes.
There are two calculation methods in expense tax, cash flow or exempt income. In cash flow, only the actual amount spent on goods or services is taxable, all savings are exempt. Saving includes purchasing any type of investment instrument such as bonds or securities. Income used to purchase these items is not taxable at the time of purchase, however when funds are withdrawn from these instruments the money becomes taxable. Under the income-exempt method, all income is taxable unless it can be directly related to earnings from the investment, which is tax-exempt.
The tax brackets need to be expanded, both to reduce the number of categories and to reduce the tax rate at the lowest levels of the expenditure tax model. In addition, it would be necessary to create tax credits to provide allowances for family circumstances, such as the number of children. The taxpayer’s age, earning capacity and local economic employment opportunities also need to be taken into account when determining applicable tax credits.
The main benefit of this type of tax regime is the removal of double taxation. Under the current system, all savings are made after taxes are paid. Any capital gains or investments are then taxed again. This double taxation is only partially offset by income tax credits and dividends.
The disadvantage of this type of taxation model is that it is effectively a labor tax. This focus can result in a shift in the leisure/work decision in favor of leisure. In the long run, this may not be in the country’s best interest.
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