Personal Consumption should be taxed instead of Person Income (Warren, 2017). This is because taxing personal income discourages people from working as hard as they are supposed to in fear of being taxed by the government. Additionally, taxing personal income will discourage people from saving, whereby they will have less money for Consumption in the future after retirement. When people have less money to consume, the economy is adversely affected, and the government will have less revenue from personal income tax collection. Therefore, an income tax is not supposed to be levied on individuals when they earn money or receive dividends, interests, and capital gains from their investments. When imposed, the consumption tax will encourage savings and investment and make the economy more efficient.
Customers will pay consumption taxes instead of business owners or workers from their salaries and savings. They are not generally collected from the government directly from the customers, which encourages customers to spend and save without the fear of being taxed (Warren, 2017). However, it is very true to argue that it’s very fair to tax people based on what they take out of the limited pool of resources via Consumption rather than what they tend to contribute to the pool with their savings.
Q2: How may it affect Saudi Economy if an income tax is imposed in KSA? (200 words). [2.5 Marks]
There is no personal income tax in Saudi Arabia since they only impose a flat income tax rate of 20% to the tax-adjusted profit from residents, non-GCC and non-Saudi individuals; if it is imposed will have a great impact on the economy (Zidar, 2019). Therefore, imposing income tax in KSA will cause a decrease in economic growth because it will induce Saudi Arabians to work less, save less, and invest less, which is opposed to the substitution effect. Additionally, imposing income tax will also decrease the individual’s income. The individuals will maintain their lifestyle by purchasing products and services that they were used to purchasing. Thin, in return, will affect the Saudi economy adversely.
Higher-income tax in Saudi will decrease consumers’ spending power in which the aggregate demand will fall, leading to lower economic growth. On the side of products and services supply, imposing income tax will decrease the incentives to work, leading to lower productivity. Income tax will also discourage the growth of new target economic activities (Zidar, 2019). It will also lead to distortions of the allocation of capital since individuals are discouraged from working hard to save for investing. The investment available is deficit-financed; hence, they are less likely to lead to economic growth.