Can income tax be abolished? What are the pros and cons of abolishing income tax?

Tax.jpg More pics» BACKGROUND: Mina and her colleagues don't look forward to the months of February and March. The take-home salary during these two months is the lowest. After employees have provided proof of tax eligible investments and expenditure, post a quick computation by the in-house payroll departments, the remaining tax liability is deducted against the salary income of the two remaining months of the fiscal year. "Why must I pay a high tax rate of almost 31% and get nothing in return," Mina has exclaimed in anguish on more than one occasion. She wishes for complete abolition of income tax. No doubt, this has been the secret if not vocal wish of many salaried tax payers. Those earning a taxable income of more than Rs 8 lakh fall in the highest tax bracket of 30% plus an education cess of 3%. But is Mina justified in her complaint? Aquick glance at worldwide personal tax rates shows that the maximum marginal rate of tax in Denmark, Sweden, Belgium and the US is perhaps the highest in the world. Also check: Budget at ET: Budget 2012 | Union Budget | Railway Budget 2012 | Budget News Yet a host of benefits are also provided to its citizens such as unemployment benefit, retirement benefit, pension, healthcare ...The grass does appear greener on the other side, but there is also a cost attached in the form of social security taxes. For instance, a salaried employee having a gross income of $100,000 would be subject to social security tax (5.7% and 7.7% being the employee and employer contributions ). It can be argued that we in India also contribute to PF. One can also say that in these countries it is the richest of the rich that are subject to the maximum marginal rate of tax. The debate can rage on and on ... Sometime last year, while flat tax was the topic of discussion in several parts of the world, including the US, a study of 54 different countries by Shigehiro Oishi, a psychologist attached to the University of Virginia, found a direct co-relation between progressive tax policies and overall happiness. The report emphasized that what matters is what governments do with the tax moolah they collect. Thus citizens of Denmark, which has a high maximum marginal rate of over 50%, were still happy. Table 1 (On A Happy Tax-High ) depicts the high tax rates and related benefits in a few countries. Of course, there are countries where individuals do not pay any tax, these are typically tax havens such as the Cayman Islands, where the zero tax rate is meant to attract the rich and the famous, or resource-rich countries such as those in the Gulf region. Neil nods his head absently, while his wife continues to rant. In reality, he, as the owner of a medium-sized business is tired of litigation, of ever changing laws and a high MAT of around 20% (with the corporate tax rate being close to 33%). A quick glance at worldwide corporate tax rates shows that several countries have corporate tax rates falling in the 25%-35 % bracket, US and Pakistan have a rate of 35 %, Australia (30 %), UK (26 %), and China (25%), barring a few sectors which get favourable tax treatment ). Once again, tax havens such as Cayman Islands have nil rate of corporate tax, Cyprus levies 10%, and Mauritius levies 15% for non-offshore companies. Some developed countries like Germany (15%) and Singapore (17%) do have more favourable rates of tax. The cost of collecting income tax is higher (more than 0.65% of the revenue collected), whereas even as no statistics are available owing to the indirect tax levy being collected both at central and state level, the cost of indirect taxes collection is assumed to be much lower Of course, for each of these points there can be counter arguments. A complete abolition of direct taxes is not required to tackle the problems of black money or to change consumer habits. Cost of collections can be lowered through use of technology ; anti-corruption measures can ensure better utilization of tax money and also curb black money. While tax-free agricultural income is a sore point for urban India, with fragmented farming and low yields, majority of rural India would continue to be outside the tax bracket.