Fairness in Taxation theory - Essay Example

?a) Fairness in Taxation theory According to HM revenue and Custom (n. d taxation idea was introduced in Britain as early as 1798 and effected in 1799 to finance its war against French forces under Napoleon. Income tax during that time was applied to both the corporations and individuals at the same rate. Income tax theory evolved to Income Tax Act 1842 (enacted by the United Kingdom’s parliament), which further evolved to the present Income and Corporation Act 1970. Corporate Tax was introduced in 1965 and applicable tax rates were differentiated from those of Income tax to make administration of tax fairer. In 1949, the income tax rate was 50 Percent. Ideally, there was not fairness because every person paid tax on equal tax rates irrespective of how much a person earned. However, when Income and Corporation Act 1970 was enacted in 1970, it improved distribution of tax burden among different income groups. Tax rates were divided into lower rate, basic rate, higher rate, and addition rates depending on the levels of income earned by individuals. On the other hand, corporate tax rates were categorized into small profit rates, small profit upper limit rate, marginal relief limits and the main rate. Categorisation of tax rates for individuals and corporation brought some fairness in the tax system. Brederode (2009) define fairness to paying tax according to ones ability. It should also be based on the benefits (public goods/services) a person or corporation receives from the government. Fairness in taxation means that all people are treated equally without discrimination. Furthermore, Adam Smith defined fair taxation as a progressive tax system. Progressive tax system imposes greater tax burden to the rich as compared to the less rich. Therefore, a person or entity pays tax according to the amount earned and public goods consumed. If a person or entity earns more income or uses more of a public good, tax burden imposed on them also increases. However, fairness varies over time and is highly subjective. According to Adam Smith, statistics indicated that affluent (rich) people often benefit more with economic expansion. Therefore, because benefits accrue more to the richer when there is economic development and expansion; it becomes natural that they pay more tax to support a government that delivers the public goods and services to them. In addition, a large corporation uses more of public good than a small corporation uses and should be taxed more. Furthermore, concerning income tax on individuals, non-domiciled citizens are required to pay taxes on income earned in foreign country to pay for the benefits he or she received when growing or residing in the original home country. The importance of fairness in taxation Fairness in tax administration is critical. This is because fairness plays a critical role in influencing tax payers behaviours and attitudes. First, fairness in taxation is an indication of distributive justice. When taxpayers feel that the tax burden has been distributed fairly, they are likely to voluntarily contribute their taxes. Therefore, tax enforcement agencies will not increase their surveillance or increase their sanctions to make taxpayers comply. Consequently, will people behave fairly if the tax system treats them fairly and the cost of surveillance or sanctions will be reduced significantly. Secondly, it reduces uncertainties. Taxpayers normally feel anxious about taxes that they pay. However, if they perceive that taxation burden has been applied fairly, their anxiety or uncertainties reduce significantly and are able to concentrate on productive activities. Thirdly, fairness legitimises the tax system. Unfair taxation system may result in psychological reactance in taxpayers and may lead to opposite and retaliatory actions or behaviours. This is because people will perceive unfair tax system as illegitimate and are more likely to evade and avoid taxes. This may result to fewer taxes collects and increased administrative costs. b) Fairness in the 2010/2011 UK’s budget. There are issues that arose from different quarters in the United Kingdom claiming 2010/2011 UK’s budget is not fair. Millington (2011) claimed that Members of the Unite, who work as minimum wage as cleaners at some of the largest banks in Britain pay more taxes as compared to the top chief executive officers (CEOs). This is because the top chief executive officers take billion of pounds in bonuses that are not taxed. It was further revealed through the figures released to PCS by Tax justice Network that large companies and affluent individuals avoided paying ?25 billion and evaded ? 70 billion. There was also about ? 26 billion taxes that remained uncollected. Unite members felt that this was unfair and could not be tolerated. In response, the government promised to look into the matter with urgency. In spite of the negative sentiments raised, the government tried to improve fairness in its tax system. According to the 2010/2011 budget, individual tax payers below sixty five years will receive ?1000 additional personal allowances annually starting April 2011. This will remove over eight hundred and eighty thousand taxpayers from the tax system who were earning low income. As a result, this will be fair for people earning less money because they will remain with additional money to spend. The government will also reduce the basic rate from ?2,500 to ?1,650. In addition, the government will also reduce national Insurance Upper earnings/ profit limit to correspond to threshold of high rates of income. The government may consider increasing tax rates for non-domiciled citizens of the United Kingdom (Hm Treasury 2010). This approach coincides with Adams Smith idea that richer people are more likely to benefit from economic growth and development and should be taxed higher. In most cases, low income earners usually have declining or stagnant income over time, while high income earners realises significant growth. Furthermore, the government wanted to reduce national Insurance Upper earnings/ profit limit in a bid to reduce the tax burden of the high income earners. In the above views, that United Kingdom’s tax system is fairer. According to the 2010/2011 budget, value added tax (VAT) will increase from 17.5 percent to 20 percent. Increase of VAT to 20 percent will impact negatively to the poor tax payers in the United Kingdom. This is because both the poor and the rich will pay equal amount of VAT for every amount of money spent on taxable goods and services. This means that the poor will have less money to spend on goods and services than the previous tax system. Many perceive indirect tax (VAT) as unfair. This is because it imposes greater burden to the poor people. According to the VAT act, all consumers of specified goods and services pay VAT at equal rates. Therefore, it does not discriminate between the poor and the rich and high income earners will pay the same amount of tax on the money spend on similar goods and services as the poor. This is wrong according to welfare economics and should not be accepted. Indirect tax has never been fair to the poor population. This is because high income earners spend less percentage of their total income on consumption as compared to low income earners. As a result, most rich people are able to save more money for other transaction while the poor have nothing left to save. However, it is claimed that both poor and the rich access equal social services. The services are usually free and should not be taken for granted. Therefore, increase in VAT rate from 17.5 percent to 20 percent makes the people worse off. This could explain why households in the United Kingdom may be ?400 poorer in the coming year. Capital gain tax has been increased from 18 percent to 28 percent. However, the increase will affect the higher rate of tax payers. This may seem to be unfair to the higher rate tax payers and may feel discriminated. Instead, the government should have raised taxes for all capital gain taxes irrespective of the type of the tax payer. Through this, capital gain tax payers will feel that the burden have been distributed equally across the board. The 10 percent capital gains rate for entrepreneurs apply to business with a capital gains ranging between ?2 million and ?5 million According to the budget of 2010/2011, small company tax rate will reduce from 21 percent to 20 percent. In addition, however, large companies will also experience progressive fall of corporate tax by 1 percent each from 28 percent in 2010 to 24 percent in 2014. Banks will also be levied additional taxes. The additional levy will be ?2 billion. The entrepreneurs’ relief life time limit will rise from ?2 million to ?5 million. Considering all the facts presented above, VAT impacts more to poor households because poor families spend nearly all their income on consumption and therefore, they are most likely to be affected with increase in the VAT rate. It is thus true that household will be poorer in the coming year. References Brederode, FR 2009, Systems of general sales taxation: theory, policy, and practice, Kluwer Law International, The Netherlands. Hm Treasury 2010, BUDGET 2010, the Stationery Office, London. Great Britain, Parliament, House of Lords and European Union Committee 2007, Stopping the carousel: missing trader fraud in the EU, report with evidence, 20th report of session 2006-07, The Stationery Office, London. HM revenue and Custom, n. d., Tax to beat Napoleon, viewed, 31 March, . Millington, J 2011, How to raise billions, viewed, 31 March, . Read More