Question

The primary revenue source of the U.S. federal government is the income tax. What makes income desirable to tax from a government point of view? Why might it be bad to tax income? Should the U.S. switch to taxing goods with negative externalities associated with them, such as gasoline and alcohol instead? Why or why not?

Answer 1

It is desirable to tax income for government as it is the primary source of government finances at the same time through progressive taxation it helps govt to promote equality, on the other hand the disadvantage of taxing income is that it discourage people to work hard and earn more money. Government is already taxing goods with negative externality but the revenues are not sufficient from these sources to cover for government spends and also if government is to increase the tax on these goods demand will fall and will not necessarily result in higher revenues and also goods like Gasoline plays and important role in Economic development and high taxation in that can have considerable negative impact on Economic activity