Friday, February 20, 2009

Consumption & Service Tax

There is an anomaly in the thinking on taxation in relation to the economic activities of production and consumption.

It used to be fashionable to think that production is the better thing to happen in the economy and therefore the income tax was seen to be undesirable because it supposedly discourages production. Hence, the service tax was invented with the objective of discouraging consumption so that more resources would be released for production, by the government from the service tax collected and the public by the amount of consumption discouraged.

Now, it is fashionable to think that consumption is the better thing to do for the melting economy because there is fallout in demand.

If the policy objective is to increase consumption, then the service tax should be reduced or abolished.

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