Abstract

There has been a long standing debate on the superiority of income tax or consumption tax as the ideal tax system among tax scholars and economists for over a century. It would be a matter of choice of policy makers since there are merits and demerits for each tax system. However, consumption tax proponents contend recently that the current income tax should be replaced with consumption tax as a means of solving budget and trade deficits in the United States. If the United States replaces income tax with consumption tax, the effect would be worldwide including Korea. Various empirical studies would be required for discussing superiority of consumption tax to income tax in Korea. If income tax would be replaced with value added taxes and the current economic situation would not be changed, the tax rate should rise to 28% from 10%. However this gives rise to the shift of tax burden from high income earners to medium and low income earners. Before the replacement of income tax with consumption tax, the measures for the shift of tax burden and transition rules should be provided.

Keywords

• Consumption Tax
• Income Tax
• Equity
• Efficiency

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