Income tax and consumption tax

The main sources of income to a Government are taxes. Here, we will look at income tax and consumption tax or GST as we are familiar with in Malaysia.

Income tax is normally progressive, meaning, the higher your income, the higher the tax rate. Hence, the rich will get taxed at a higher proportion of his income than the poor. This type of tax results in the rich subsidising the poor.

For GST, you pay tax on what you consume at the same rate for all taxpayers. One argument is that GST is fair because you are only taxed for what you use. However, everyone needs to buy necessities. The poor consumes a much higher proportion of his income than the rich. Hence, he will end up paying a high tax rate than the rich. The poor gets hit much harder than the rich in a GST tax system. GST is a regressive tax.

What is important ultimately is what the Government does with the tax revenue. Any imbalance arising from the tax system can be addressed by the Government through its socio-economic agenda and spending.