What would abolishing Income tax mean to the Economy?

Disclaimer : I have not studied the claims or propositions made by the bureaucrats but this is my interpretation of what they can be, does not necessarily coincide with the proposition are or otherwise.

So, What would abolishing ‘INCOME TAX’ mean?
Its simple it means what ever your income no payment of and portion of it as TAX to the government.

Government relies on TAX, what would it do?
Well that is true the government does some operations for the people and provides services to common man for free or a minimal cos, for which they employ and have to pay to employees, now they don’t have a revenue model which works on basis of profit or sales. So from where does this money come from, yes you are right the TAX includes various kinds of taxes one of which can be income tax. Now the proposition of the bureaucrats was to abolish all kinds of taxes, what would mean no money to the government from taxes.

How would the government earn without taxes?
It can not sell products/services to make profit and earn money, that not on their agenda(here I am considering and Ideal govt. ;) ). Other option is to sell resources which can be land, coal mines, fuel wells, spectrum etc. these are the few ways which I can understand that it can sell in order to make money, it would not account much as compared to the Income Tax as it was a direct money on annual basis, but it would be one part of it. The trick here is even after selling these essential natural resources the govt. must regulate in order to keep the prices down that again is a different issue we can think of later once we reach that stage.

Would selling resources compensate for collected taxes?
No, it won’t as it is on auction basis or one time sale basis the govt. can collect enough money to continue its functioning but its a one time money it would end and it can not rely on it for long.

Why would the govt. abolish tax, if it would leave it crippled?
Because if it did not, it will leave the subjects crippled, the current system of tax collection here is widening the gap between the poor and the rich. The very poor and the very rich escape taxes and the burden is on the class which lies in the middle what we call as a middle class. The problem of paying tax is the amount of tax paid by the middle class is way more that what services they are getting. The other issue of this age old system with million amendments is that its too complex and is having loopholes of which the opportunists make use of to escape taxes, which again is a breeding ground for black money and shadow economy which might be a more serious problem.

What is black money?
The money which is hidden from the government is ‘Black Money’ as simple as that. The money which exists in the economy but is not on the records is one more definition of it.

Why are people hiding money from the government?
If you observe carefully its the money that is not paid to the government as tax. What would be your reaction if I would ask you to pay more then a quarter of your Income as tax to the govt.? Precisely. Say for e.g. you buy an house The amount you pay is total of the amount on the receipt and the amount paid to the constructor in lump sum. well the builder does not want to pay the tax so what he does is show the price of the house far less then the actual value. Which would mean the govt. would incur only tax on the money that was on records, now here the existing taxing system is concentrating only on the person who is getting the money by taxing him on his income to reduce it people hide tax, now the assumption here is that the person who is paying the builder has already paid tax which is not the case always. That’s how the money ends up off the records, hidden from the govt. and laying in the shadow economy.

What are we loosing?
The transparency, it is very important for the monetary system to be transparent in order to progress. For in the current system every time a transaction is made and the tax on that transaction is not paid as the money is kept off the records, the money enters the shadow economy and it is not available for use. Its there but its can not be used, and it is hurting by increasing the inflation.

The solution?
Solution to the above problem can be found by abolishing two thing, one the income tax and other the higher value bills (monetary notes of value 500 and more). If we don’t have income tax what can we replace it with? the answer to that question is transaction tax.

What is transaction tax?
Instead of taxing people on the money they earn tax on money they spend. Say for e.g. A transaction happened between two persons of

100 the person has to pay a tax of 1 to 1.5 %. so the total amount of the money paid by the buyer is 101.

How is it better than current tax?
The new system states that the tax has to be incurred only on the transaction made and not on the total income, so the purpose of evading tax is gone, people evaded tax by showing a low income now they do not need to do that as the tax not on the income so all the money would go into banks and will be on records which makes it available for investment and hence progress can be made and inflation reduced. The same money which was in shadow economy is now in the banks and can be invested in new markets. This system also tries to reduce the gap between the rich and the poor as rich would make bigger transactions hence have to pay a proportional bigger amount of tax.