Issues Relating to Taxation and Housing in the UK - Essay Example

?Taxation and Housing Issues Introduction Taxation and housing are two crucial areas that reflect the economic performance of a country. Generally, countries with stronger economic background levy comparatively lower tax rates on sales, income, and other transactions. In contrast, developing countries often charge higher taxes in order for meeting their rising fund needs. Housing is one of the major necessities on which every nation gives its primary focus. To be specific, adequate housing facility is one of the most potential determinants of a country’s overall growth. Hence, in order to understand the economic feasibility of a particular country, a close analysis of the prevailing issues on taxation and housing is necessary. This paper will critically analyze various issues pertaining to taxation and housing in the United Kingdom, United States, and United Arab Emirates. Issues relating to taxation and housing in the UK The economic spectrum of the United Kingdom indicates that taxation issues have impeded the faster growth of the country. UK holding companies have been heavily suffering from tax issues in the recent years. Corporation tax deductions are available to a UK holding company on the interest payment to investors subject to anti-avoidance policies. More details on these features can be found at . The anti-avoidance provisions including transfer pricing are increasingly complex in nature and therefore the country’s holding companies are not benefited from tax reductions. In addition, a UK holding company does not get any tax deduction benefit while paying dividends to investors. Similarly, the tax deductions allowed to the UK’s small scale enterprises for boosting entrepreneurship actually result in a deadweight cost. This situation adversely affects the overall growth of the economy. Over the past few years, the UK government has faced a series of issues associated with the country’s corporate tax structure. In order to resolve the limitations of its corporate tax structure, the country is changing its policy from taxing worldwide profits to a more territorial taxation approach. Irish tax issues on UK transactions remain to be a major growth impediment to the UK’s business sector. Tax evasion has been a potential issue in the UK over the last few decades, and recently the country adopted tax fraud prevention measures. When an outsider deals with purchase of real property in the UK, he has to consider a number of factors including capital gains tax, stamp duty, inheritance tax, and income tax. The UK housing market has been struggling with numerous issues especially since the global financial crisis 2008. As a result, even small flats are becoming unaffordable to lower class of the society. Housing sector data show that affordability of housing in the UK has been getting worse since late 1990s as house prices grew faster than earnings rate. Although most of the developed countries including the United States experienced housing price increases in the beginning of the 21st century, this issue was different in the United Kingdom in two aspects. Firstly, the country’s house prices boom began earlier as compared to other developed economies, and indicated relatively sustained increases. Secondly, the regional pattern of the country was almost uniform. As per statistical data, house prices in the United Kingdom increased by 90% between 2002 and 2007. The average age of first time home buyers is also increasing in the country. Although mortgages were increasingly available to people, mounting housing prices remains to be an issue in the country. As reported by Department for Environment Food and Rural Affairs (2004), an additional 39,000 houses per annum were essential to meet housing requirements of the country effectively. The primary issue behind the housing market struggle in the UK is that the country does not have enough space to build new houses. In contrast, many people possess more than one house and some non-residents, especially some rich Saudis and Russians, own houses in the United Kingdom. Many economists are of the view that increased divorce rate also increases the house prices in the country. Although the UK government has taken a series of measures to deal with housing sector difficulties, the problem still remains unsolved. Issues relating to taxation and housing in the US The United States’ jurisdictions follow separate taxation policies as their social security tools. Majority of such policies have been criticized as either too progressive or too regressive. Jurisdictions try to replace their existing type of taxation with another type of tax; and this practice has intensified taxation issues in the United States. Details of the US tax rates can be viewed at . According to the details, the US has income tax rate 35%, corporate tax rate 35%, and sales tax rate 0% whereas it is 50%, 28% and 17.5% respectively in the United Kingdom (ibid). Evidently, the US tries to promote its product sales while the UK encourages its corporate sector. A relatively high corporate tax rate seems to be an issue in the United States as this condition may adversely affect the corporate sector development of the country. In addition, higher tax on hedge funds and private equity managers is another important issue in the United States. Currently, income tax is not applicable to private equity and hedge funds; instead, they pay tax on capital gains. As Reuters (2010) reports, The Federal Government imposes penalties on “foreign banks that fail to report US income”; and this policy tends to affect the market operations of foreign banks including Credit Suisse Group AG and HSBC. Neeley (2011) argues that paper companies are misusing the provisions of a federal tax credit program designed to foster bio-fuel development. Many paper companies mix their by-product called black liquor with a fixed amount of diesel and thus reap the benefits of tax concessions unfairly (ibid). The United States’ housing sector has been struggling with housing bubble for the last decade. The house prices reached at its peak in early 2006 and then began to decline during the 2006-07. The report on Case-Shiller home price index’s largest price drop can be read at . Increased rate of foreclosures among US homeowners during the period 2006-07 led the nation to a housing sector crisis in 2008. As Laperriere (2006) points out, the collapse of this housing bubble might negatively affect home valuations, mortgage markets, real estate, home builders, foreign banks, and institutional investors. As a result, the Federal government was forced to allocate over $900 billion to prevent the collapse of the housing bubble. However, the US housing bubble collapsed at the peak stage of 2008 global financial crisis and severely affected the country. This even worsened the housing activities of the country despite financial packages designed by the Federal Government. The foreclosure filing still remains to be an impediment to the recovery of the US housing sector. Exotic mortgage loans and increased speculation also appeared to be major issues in the housing segment. The impact of global crisis was severe, for the US economy has not yet successfully reduced the level of foreclosures. Despite the huge lending for housing purposes, large number US people are still homeless. In addition, the house prices in the country remain inflated because of thoughtless subsidization programs. Spending more and more on banking sector in order to survive the housing issues would flaw unless the country builds up a strong economy. Issues relating to taxation and housing in UAE While comparing the United Arab Emirates with the US and the UK in the context of taxation policies, UAE is evidently far better than the other two. The UAE does not impose any tax to people. However, the burse of real estate and asset bubble has raised some potential challenges to UAE. As per reports, “Dubai, the flashiest of the seven emirates, faces a grim situation and indebted state owned companies are being forced to sell assets in order to repay creditors, most notably Dubai World with a debt pile of $39.9 billion” (Fuchs, 2010). Hence the country is planning to raise income taxes from the wealthy residents. However, as economists predict, the introduction of tax measures may seriously impact expatriates and their businesses. The current financial market struggles may cause the UAE government to extend its tax impositions to several other sectors also. Majority of the native people are against such taxation policies as they want Dubai to be the cheapest city in their region. One of the most significant attractions of UAE is its tax free status. Hence, imposition of any form of tax would adversely affect the growth rate of the country in the long run. Till date, there are no taxation issues in the country except this new tax imposition proposal. Despite its abundant oil reserves, tax free status, and high growth rate, housing issues raise serious challenges to the UAE economy. Housing issues are more prevalent in regions like Dubai and Abu Dhabi where the UAE government fails to provide adequate housing facilities to the country’s population. The construction activities in the country mainly concentrate on luxury and tourist sectors and do not pay attention to middle to lower income classes. According to a study, a shortage of 20,000 houses was identified in Abu Dhabi by the end of the 2007. This issue contributed to inflationary pressures and raised cost of living in the city. Obviously, housing shortage directly leads to an increase in rents; and middle class people are compelled to pay a significant percentage of their income on rents. Economists opine that this worse situation may negatively affect the competitiveness of the country. Studies also point out that current housing projects would not meet more than 20 percent of the identified shortage in the country. Some reports suggest that rent freezing for two years would be an effective strategy to improve the current housing shortage of the country. In contrast, as reported by International Property Investment (2008), Khalfan Al Ka’abi, Chamber’s construction committee chairman, opposes the rent freezing strategy and argues that this policy may discourage investments. He adds that construction of more units may be the sole solution to this problem (ibid). In addition to the above stated factors, higher rate of population growth also has intensified housing shortage in UAE. Comparison Every change in the economy of the US and the UK would influence the entire world as they are the most powerful countries. UAE is a very small country when comparing with other two countries under consideration. However, UAE does not levy any tax on its citizens whereas both the US and UK impose different taxes including income tax, corporate tax, and sales tax. Hence, UAE is a more attractive destination than the United States or United Kingdom for investors and businessmen. It was UAE’s oil rich status that assisted the country to free its citizens from tax impositions. However, the country is now planning to raise income in the form of taxes from its wealthy people. When the global financial crisis 2008 adversely affected US and UK seriously, the UAE went almost unaffected. It directly indicates that UAE is a more economically-feasible economy than the US and the UK. The housing bubble issues that harmfully impacted the US remain to be a growth impediment to the country because of the increased rate of toxic mortgage loans. The increased rate of foreclosure filings also prevents the Federal Government to escape from its housing issues. Although UK’s housing issues are not as severe as those of the US, the country’s housing facilities are still unaffordable to its poor classes. The UK does not have adequate geographical structures to meet its growing housing needs. Comparatively, the United Arab Emirates has improved housing status even though the country’s housing supply is not equal to its housing demand. However, the housing sector analysis of the three economies indicates that UAE offers housing facilities to its people more effectively than the US or the UK. Conclusion In total, issues relating to housing and taxation are more complex in the US and UK than in UAE. The US is more affected by taxation and housing troubles as compared to UK. The global financial crisis 2008 also added to the housing issues and tax hikes in the United States. Abundant natural resources and the well structured economy significantly aided UAE to be one of the most attractive destinations for global investors. References Department for Environment Food and Rural Affairs (2004) “Study into the Environmental Impacts of Increasing the Supply of Housing in the UK” http://archive.defra.gov.uk/evidence/economics/foodfarm/reports/documents/Housing.pdf Fuchs, M. “UAE toying with taxes as a new source of income”, Arabian Business.com International Property Investment “Abu Dhabi and Dubai public housing issues” Laperriere, A. “Housing bubble trouble” The Weekly Standard, vol. 11, no. 28. Neeley, T. Pulp, paper companies amend tax returns actions could cost taxpayers billions of dollars. The Progressive Farmer http://www.dtnprogressivefarmer.com/dtnag/home Reuters “FACTBOX-Big tax issues pending in U.S. Congress” “Tax issues for UK holding companies” (2011) Out-Law.com “UK personal tax rates”, Taxrates.cc United States Housing Bubble, Ahorre.com Read More