Taxation in Theory and Practice - Essay Example

?TAXATION IN THEORY AND PRACTICE ASSIGNMENT of SECTION Introduction A tax system that is efficient should posses the following attributes. It should minimize effects on prices that are relative for purposes of maintaining production efficiency and undisrupted resource allocation (Zhong 2011, p.15). People get taxed by the state in order to finance the revenue requirements. It is advisable for the Mayor of Spinney to adopt a tax system that is regressive. This is because in Spinney state, there is free movement of goods, services and people. Regressive tax system allows race heterogeneity and population mobility. In addition to that, the Spinney state is in dire need of increasing its revenues. The capital saved by the wealthy individuals can be used to finance the state investment projects (Palil, 2009, p.60). Thus, individuals should be taxed annually depending on their income (GBP) as illustrated in the table below. Income(GBP) % 1-2,440 10 1-37,400 20 37,401-150,000 40 Over 150,000 50 Data source: UK Tax rates 2010-2011(http://www.worldwide-tax.com/uk/uk_taxes_rates.asp) The rate of 10% responds to the income savings of up to 2,440, whilst income dividends below 37,400GBP tax rate is 10%, whereas, income dividend of GBP 37,400-150,000 is taxed at a rate of 32.5%. Finally, those exceeding 150,000GBP should be taxed at a rate of 42.5%. In terms of social security, individuals should be deducted based on their salary. For instance, employers should be deducted a tax rate of 12.8% on salaries above 5,715 GBP, employees at a rate of 11% on salaries of GBP between 5,715-43,875 and an additional of 1% for salaries above GBP of 43,875. On the other hand, self employed should pay a tax rate of 8% for income of 5,715-43,875GBP with an additional of 1% on incomes above GBP 43,875. Corporate tax should be at a rate of 28%. For UK based resident companies, the tax rate should be 21% only if their annual profits are below 300.000GBP. Individual capital gains should be deducted at a tax rate of 18%. The mayor of spinney state should ensure transparency so that no conflict might arise when implementing the tax system. Tax Burden Distribution Regressive tax system is majorly used by numerous states. This implies that the state average rate of tax declines with income. This type of tax system moves taxes burden disproportionately to deprived individuals. In that case, it tends to limit the taxpaying burden on individuals with greater capabilities of paying. This, therefore, is an unjust agenda to the poor individuals with low income levels. Despite their low income levels, they are supposed to pay the same amount of tax in relation to highly paid individuals. It works effectively in reference to taxes that are fixed regardless of an individual income level. For better illustrations, here is an example to drive the point home. Cigarettes taxation by state and federal is a perfect example of a regressive system. Smokers categorized as low-income pay taxation rates that are higher compared to their counterparts. Despites its limitations, it has its own advantages. The regressive system helps in freeing more investment finances from individual with high incomes. This is because their income greater portion is always saved. Alternatively, a state can employ progressive system of taxation. In this system, the percentage tax paid by an individual increases with income. Thus, the more you earn, the more you pay relieving burden from deprived individuals. For instance, an individual earning 120,000 pounds will pay a tax rate of 12,000 pounds (10% tax rate), whilst one with 20,000 will pay a tax of 1,600pounds (8% tax rate). Unlike progressive taxation, regressive taxation operates in a way that tax reduces with income increase. Thus, in progressive tax system, tax paid proportion, increases as income rises. There is no tax that can be proportional as individuals cannot pay the same level and amount of tax. United Kingdom with Different tax rate In the UK currently, there is application of wide range of taxes apart from the normal incomes taxes of an individual. These are such as national insurance contributions, inheritance tax, stamp duties and loan repayments by students. The self assessment system (SAS) advantage is that, it allows taxpayers to have authority on the problems concerning tax payment. This eventually enables them to come up with ways of furthering reforms. The improved reforms will aid in the simplification, unifying and improving of personal taxation system. This is majorly in correlation to services offered to customers. In UK, self employed collection cost is greater in comparison to employed individuals. In United Kingdom, tax collection depends on the income of an individual. For instance, in terms of social security, the self-employed individuals pays a tax rate of 8% while the employed pay a tax rate of 11% on incomes between 5,715-43,875GBP. United Kingdom Income Tax Receipts Analysis in million pounds (2002-2008) Years 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Receipts other than assessment of self 99,695 107,381 114, 992 121, 852 133,129 135,269 PAYE 94,243 101,389 108,699 113,894 124,799 126,760 Assessed income tax 231 183 194 174 173 208 Scheme for interest tax deductions 2,122 2,092 2,266 2,969 3,124 4,134 Other source tax deducted 1,160 1,081 1, 188 1,400 1,744 1,564 Other Receipts 1,938 2,637 2,645 3,416 3,290 2,603 Self Assessment, net of repayments1 16,059 15,772 17,141 18,077 20,306 22,443 Repayment other than self assessment2 -6,247 -9,185 -9,213 -9, 450 -10,108 -10,388 Total net receipts 109,507 113,968 122,920 130,480 143,327 147,323 Data Source: HMRC 2009 (http://www.hmrc.gov.uk/stats/tax_receipts/table2-8.xls) Tax compliance and acceptance of High tax by citizens of Spinney Understanding the reason behind tax payers not complying or complying with available tax regulations should be the major concern for the Spinney Mayor. Hence, complexity optimal level determines the taxpayers’ extent to which they are able to comply with the tax system in place. Furthermore, it will also be determined by factors such as compliance cost transparency. The cost is associated with taxpayers’ degree and complexity level of cost internalization. For instance, if an agent responsible for charging tax does it at a flat fee then the Spinney citizen would readily comply rather than avoid paying tax. Therefore, taxpayers are always ready to take tax minimization approach that is risk based in reference to conceived audit risks and penalties timing and size. A citizen (employed and self employed) may avoid to pay tax depending on the following, their tax system integrity perception (how they perceive the tax system), their placed value on the broader and equity revenue collection objective. If majority of citizens in Spinney indulges in avoidance of tax, it will negatively impact their fellows’ willingness to act accordingly. This will eventually undermine the state integrity of their tax system. Such a case results to increase in enforcement and monitoring compliance. In addition to that, it will trigger the utilization of legislations that are anti-avoidance. Activities such as anti-avoidance and non-compliance provide a society with net benefits. However, the outcome is increased compliance and complexity costs. This is due to the information increased demand to strengthen the activities of compliance administration. Effects of the UK tax system on labor The UK tax system impacts on labor significantly. The number of civil servants has to be increased in order to manage the collection of tax. This positively impacts on administration costs. The cost has to increase due to workload increase of ensuring that each and every citizen complies. Self assessment system form of tax is more efficient as it cuts on administrative costs. SECTION 2 History of the UK taxation system The United Kingdom income tax began in 1790. This was the period when France had a continuous warfare with the British. Taxation innovations were triggered by British and France resource concerns. In the year 1798, Triple assessment was introduced by William Pitt, the UK prime minister at that period. This eventually led to the expansion of the income tax in the year 1799. The expansion majorly focused on income taxes that were property-based. Property based income tax were such as house value and rentals tax. Pay-as-you-earn (PAYE) a system of income tax was implemented in 1944. In this system, tax deduction was performed on employee wages. Source taxation at source was the key tax system of the UK. The system was very effective and efficient and boosted government revenues. The revenue was in terms of cash flow improvement, bad debts reduction and tax payers were relieved from monthly or weekly taxes payments. These resulted to enormous annual payment reduction annual tax. 1965 saw the establishment of brand new taxes. These were capital gains tax (real property gain tax) and corporation tax. The essential purpose of capital gain tax was to significantly increase tax payers’ revenue and consequently reduce non-compliance and raise equity. In 1984, there was the emergence of inherent tax. The tax replaced the launched capital transfer tax in 1975. In 1996-1997, self assessment tax system (SAS) was introduced in the United Kingdom (Lymer & Oats 2008, p.341). The introduction was triggered by various key reasons. The first reason was due to the steady increase of administrative costs since 1970 to 1990s. Inland Revenue Board revealed that collecting tax cost between1974-1975 was approximately two hundred million pounds. The money collected was utilized to pay staff salaries. Secondly, tax credit debates in the beginning of 1970s enhanced SAS introduction. The debate based its argument on low income earners reduced-rate band. The debate pointed out that, this type of system would imply years of terminal adjustments. This is because the tax amount withheld every seven days would not accumulate to the sum tax expected annually. Thus, the SAS introduction for UK individuals was done for purposes of increasing collection and administrative tax efficiency. Incorporation of both the capital gain and corporate tax in the Spinney state For the case of Spinney state, it should utilize both the capital gain and corporate tax. However, capital income appropriate taxation is a controversial issue among scholars and policy makers. Capital gains are implemented at a personal level rather than at the level of a corporate (William et al 2010, p.725). Capital corporate gains tax incorporates corporate income large portions. Therefore, 21% of the income of the corporate will be subjected to tax. Moreover, capital gains of an individual will comprise of 18% of income. For the case of Spinney, it will be as illustrated. Spinney as a state is made up of effective and efficient manufacturing base. In addition to that, it acts as a centre for numerous companies offering financial services. These results to working population of 80% and self employed amounting to 20%. The average earnings from the company are sixty five thousand pound (65,000pounds). Majority of the Spinney population earns more than 120,000pounds and the least, little than 20,000pounds. Thus, tax deducted from the company will be 21,095pounds (21% tax rate). Individuals employed in the company will pay a tax of 57,143 pounds (18% tax rate). However, the corporate capital gain tax exhibits its own limitations. For instance, investors that are both domestic and foreign are taxed separately. This attribute greatly affects asset ownership pattern. In addition to that, corporate capital gains taxes are responded to by corporations in numerous planning tax activities that exhibit distortional impacts. Despite these limitations, alternative solutions can be made via the consideration of recent corporation taxing at the rate equal to ordinary income. Moreover, repealing of this type of tax system would result to lock-in-effect elimination. This would result to a gain that is efficient. Reduction of the rates of corporate capital gain tax system would diminish the corporation tax burden. Consequently, corporate investment would be greatly encouraged. Through the utilization of both tax systems, the state of Spinney would improve on its economic efficiency. In addition to that, the state income and population wage will increase accordingly (Desai 2006, p.1079). Tax collection and compliance Hostility exists between tax collectors and tax payers when it comes to issues of compliance. Tax compliance hostility began long time ago when tax was introduced into government systems. Individuals and organizations perceive tax to be problematic. Hostility behaviors characterized by taxpayers signifies that, given the opportunity, tax laws would not be complied. Such a jig saw puzzle can only be solved through the taxpayers’ behavior understanding. For instance, tax collectors should understand tax payers’ attitude influence towards compliance and how they can influence those factors (Marti 2010, p.113). SECTION THREE Benefits of promoting Merit Goods Spinney state should work towards the promotion of merit goods. For instance, the mayor should come up with economic policies that will enhance positive externalities. In that case, the following approaches should be considered. The state should strive to increase the demand and supply of state goods and services that generates benefits that are external. Through government subsidies and grants to producers, the production costs will be reduced thus, more supply will be encouraged. This is a remedy common in supplying of merit goods such as social housing, health care and education. Positive externalities can result from fully maintained public goods such airports, bridges and roads from tax revenue. Reduced cost of production significantly reduces prices paid by customers. New technologies resulting from research and development, is a production potential by-product that can be benefited by numerous firms. Through technology sharing, wide spread benefits can be generated and increase a firms competitive advantage. Given the spinney tax system, all these can be achieved through effective budgeting. Conclusion A perfect tax system should generate adequate revenue to satisfy the society basic needs. Thus, it should have the capacity to meet public service demand. A tax system should be very transparent. In that case, tax system information should be easily available to tax payers and leaders. The information provided shows who pays the tax, what it is used for and how much an individual is taxed. In addition to that, those who gain from tax avoidance, credits and deductions are brought to the limelight. Bibliography Desai, M.A 2006. Tax corporate capital gains. Journal of tax analysis, pp.1079-1090. Lymer, A and Oats, L 2009. Taxation: Policy and Practice, Birmingham, Fiscal Publications. Marti, L.O., 2010. Tax payers’ attitude and tax compliance behavior. Journal of Business and Management, Vol.1, pp.112-120. Palil, M.R., 2009. Tax knowledge and tax compliance determinants in self assessment system in Malaysia, Birmingham, Birmingham Business School. Williams, G.M., Hughes, J. & Levine, C.B., 2010. Influence of capital gains tax policy on credibility of universified disclosures. The Accounting Review, vol.85, no.2, p.719-743. Zhiyong, A., 2011. Regressive state tax systems: Facts, several possible explanations and empirical evidence. Annual conference on Taxation, p.14-23. Read More