Consumption, not income tax is often thought to be a fairer basis on which to levy a progressive personal tax. Compare and contrast the two types of taxation and assess, making use of relevant examples, the extent to which each meets the desirable characteristics of a 'fair' system of taxation.

Introduction to UK taxation system

Tax may be defined as a financial deduction from something which is received, owned or purchased (James 2009). This deduction is made by the government i.e., the central government or the state government for increasing its revenue so that money can be spent for the benefit of society at large. In UK also, the government imposes various taxes so as to provide funds for public services including healthcare and social welfare (James 2009). The UK taxation system comprises of two types of taxes which are direct and indirect in nature. A direct tax is a tax in case of which the impact and incidence are on the same person as it is paid and borne by the same person. The examples of such taxes are income tax, capital gain tax, corporation tax and inheritance tax (Brown 2017). The administration of such taxes is in the hands of HM Revenue and Customs (HMRC). In case of indirect taxes, the impact and incidence is on two different persons as this form of tax is paid to the government by one person but its ultimate burden is on the different person. The examples of such tax can be Value Added Tax (VAT), stamp duty, custom duties, excise duties. This tax is also administered by HMRC (Avalara 2017).

The present report describes two main types of taxes which are income tax and consumption tax as both have great influence on individuals. The discussion on the desirable characteristics of the taxation system has been carried out. The report also compares the taxation system of income tax and Value Added Tax (VAT). The comparison has been done with respect to the extent to which each system of taxation fulfills such desirable characteristics in UK.

Income tax

Income tax is one of the direct taxes which are paid by an individual on incomes earned in a particular assessment year. This form of tax was introduced in 1799 and it was the first tax in British history which was imposed upon the earnings of people to provide cover for Napoleonic Wars (Brown 2017).

It constitutes a certain proportion of an individual's income which is collected by HMRC. This income may include income from employment, profits from business or profession, state benefits, pensions, retirement annuities, rental income and income from trust (GOV.UK 2017). The income tax allowances and reliefs are provided to individuals which reduces their tax liabilities. The deduction for income tax is made at source in most of the cases by the provider of income and is paid to HMRC. The rate of income tax ranges from 20% to 45% (GOV.UK 2017). There are certain incomes which are ignored while calculating income tax. Such incomes are income from individual savings accounts, interest from the tax-exempt savings account, premium bond wins and working tax credit.

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