The Pro And Cons Of The Income Tax And Commodity Tax

As a requisite for guaranteeing the normal operation of a country. Taxation is indeed a significant means of intervening economy and achieving the macro economy policy targets by the state. However, the traditional taxation and principle can not expatiate perfectly on the bran-new economy environment, during the specific era of what China economy is transforming as well as the international circular flow of economy is forming.In western developed countries’ history of tax, taxation of commodity and taxation of income developed alternately and finally constituted the relatively complete basic frame of the tax system. Nevertheless, the conclusion maybe not tenable without the hypothesis, because the two taxation theories was the deduction under the strict hypothesis. Therefore, a theory within highly academic values can’t always apply successfully in a specific national tax reform, especially for China suffering a unsteady market economy.The thesis of this paper date from the Lump-sum Principle in the Intermediate Microeconomics, which means that income tax, benefits consumers greatly more than production tax when the amount of tax revenue is the same. So we know that the income tax is reasonable considering from the efficiency of the consumer, while the existence of product tax isn’t appropriate enough. But in fact, there are both product tax and the main part of Chinese taxation is product tax, on the contrary, the income tax is in a dominant position in America. Thus the variable, the foundation of choosing tax system, is very complex, and we must consider the construction, the variety and other factors of the taxation in order to maximizing the profit and achieving the sustainable development of economy.In this paper, the author attempts to explain the reason why income tax and production tax exist simultaneously in almost all countries, and some countries prefer the production tax or income tax by exploring respectively the conditions when one tax system is more ascendant than the other by using general equilibrium approach, mathematical analytical method, contrast, referring literature, and chart analysis based on the consumer behavior theory in microeconomics. Finally the author want to find a more reasonable model for the unfinished taxation reformation in nowadays China, instead copy the western pattern blindly.After referring and selecting the books including e-books and the various resources from internet, analyzing, summarizing and carefully considering, the author get the train of thought of the discourse. The whole paper is divided into6chapter:Chapter1is the introduction of the whole article, giving the main problem and the contentions as well as presenting the current condition by reveal the correlated statistics. Chapter2is the literature survey which concludes two parts. The first part introduces the changing theory of taxation. The second part sums up the research result of the construction at home and abroad.Chapter3studies the relationship between the wellbeing of the consumers under the income tax and production tax system by changing the utility function. Chapter4and5discuss the factors influencing Budget line position, especially tax cost. Besides there are also correlated Simple mathematic analysis in this chapter. Chapter6mainly summarizes the former discussions, and proposes some suggestion for our country’s tax system reformation. The chapter3、4、5is the main part of the whole paper.In this paper, the hypotheses of lamp-sum was loosened, and the tax cost was added into consumer behavior theory before analyze the movement of the after tax welfare of the consumer. And there are initial mathematic analysis and general interpretations about the reasons for the changes.After the hard study, a conclusion was drawn:no matter which tax system a nation stress on, income tax or production tax, or regard them the same, the choice is influenced by many factories. So that we can’t treat different situation the same or just emphasize one side. For example, different utility functions lead to different optimum choice for consumers, income tax and production tax have their own advantages disadvantages, budget line’s transition, rotation and the extent to the movement affect the decision the consumers make as well as their profits. The factors that affect the transition of budget line include:the social environment and policy of the nation like economy, legal system, taxation and the level of development of the society; the tax cost which contains the economic cost, collection cost and so on; the moral of taxing; macroeconomic policy; inflation; demand elasticity; supply and demand; category of production and so on. The tax cost is most important among them, so this paper will mainly analyze mathematically the tax cost. The consequence shows that there will be a new conclusion differs from old one, if we loosen the hypothesis, and the production tax will be better in certain situations. Nowadays, the tax systems imposed by countries are not the optimum ones in theory; however, they are the better options under the specific situation.The best one is always the most appropriate one. A country can’t chase the optimum in theory or other countries succeed blindly. As for our country, it can’t afford the tax system that income tax is the main body, because the lack of kind of force.All in all, author thought that China ought to establish and perfect the taxation system in the aspect of macroeconomic environment and the level of the development, legal system, tax construction, quality of citizens and the collection system of taxation.