Integrating Personal Taxes and Benefits - Assignment Example

? Integrating the benefit and income tax systems into one system of the current systemIn the current UK taxation system, income tax system is different from the benefit system. Income tax system has two different types of taxes – income tax and national insurance. Income tax involves the amount taxed on individual earnings such as salaries, business profits, sales, corporate profits, capital gains and other sources of income. On the other hand, National insurance contributions include the amount taxed on contributions towards insurance policies. These two systems worked independently in the past and the tax authorities maintained separate tax systems for income tax and national insurance contributions. Income tax was taxed annually in a progressive manner on individuals and corporate bodies whereby low income earners were taxed lower than high income earners (UK Government, 2012). The tax rates increased with increase in incomes of individuals. On the other hand, benefits are payments to individuals by the state. They are paid to individuals through the bank, credit union account or building societies. If one does not have any of these accounts, he/she may be paid through Post Office card account. There are various types of benefits in UK. Attendance allowance is a tax-free benefit paid to individuals of over 65 years who are mentally or physically handicapped. Two rates of up to ?71.40 are payable per week. Carer’s allowance is payable weekly in advance or every 4 or 13 weeks. Child benefit is a universal claim by parents for their children (BBC News, 2012). They are paid after every four weeks in normal situations and weekly for single parents. Tax credit is also paid weekly or after every four weeks, to families with children, whether the parents work or not. Disability living allowance is is a tax-free benefit payable after every 4 weeks to disabled people who have walking difficulties and who need someone to help them walk. Other types of benefits include crisis loans, council tax benefits, community grant care, child trust fund, etc. 2. Description of the proposed recommendation The proposed recommendation requires the integration of income tax with benefit systems. To achieve this, the UK tax system first needs to merge income tax and National insurance. These are two different ways in which income tax are paid in UK. Maintaining the two types of tax systems may be costly, less transparent and burdensome. Integrating the two systems will therefore bring forth an easier method of paying income tax in UK. The integration of income tax with National insurance contribution makes it more transparent for the tax system. The progressive taxation in UK includes 20% basic rate, 40% higher rate and 50% additional rate of income tax (Mirrlees et al, 2012). If this income tax is integrated with National Insurance Contribution, the new rates may be 31%, 41% and 51% respectively. This is a more transparent mechanism which enables individuals to pay for their taxes more easily at once rather than maintaining two separate tax accounts. The second step in the integration of benefit and tax systems is the integration of the benefit system. In this case, the benefit and tax credit systems are merged together. This is a messy and complicated mix of overlapping programmes. The programmes which need to be include programmes needed to provide support for low-income families and benefits provided to give non-means-tested support for various contingencies. The former class of programmes includes job-seekers allowance, income support, housing benefit, pension credit, child tax credit and council tax benefit. On the other hand, benefits for non-means-tested support for contingencies include state pension, disability allowance, carer’s allowance, winter fuel payment etc (Mirrlees et al, 2012). Because several families claim these benefits simultaneously, it is necessary to integrate the two systems into one manageable system. The recommended system requires the integration of the many benefit and tax credit systems into a single benefit system with a coherent structure and only one set of rules. This integrated benefit system could then share many features of the current system, if necessary. After integrating the income tax with national insurance contribution, and benefits with tax credit, the two resultant income and benefit integrated systems are then integrated to form one single structure with coherence and simplicity. The integrated systems involve more transparent base rates. This type of integration includes administrative integration and rate schedules integration (Mirrlees et al, 2012). Administrative integration involves several proposed steps. One alternative is to withdraw means-tested support through the tax system. Benefits are to be withdrawn until they are exhausted, and then taxes are paid. These two processes are to be administratively combined. Another alternative is to give all claimants their benefit entitlements and then the means-test is administered using the tax system to draw back excess benefits from those who have high incomes, so as to reduce their entitlements. Other proposals for administrative integration involve using the tax system to withdraw excess benefits from individuals and then pay out benefit claims net of income tax and benefits. In this case, employers will be required to pay wages which reflect a single deduction/addition system. The differences between benefit and tax bases make it difficult for administrative integration to materialize. An integration of rate schedules is therefore necessary, according to the recommended integration system. Sequential assessment of tax and benefits is necessary in this case. This mechanism involves calculation of one income measure after another, rather than using the same income measure for all calculations. 3. The purpose of merging both systems There are various reasons for the merging of the two systems; benefits and tax systems. First, integrating taxes and benefits makes the rate schedules to be more transparent and coherent. With an integrated benefit and tax system, people perceive the system to be transparent and become more willing to collaborate with the state in implementing the tax and benefit systems. The system integration also eliminates the separation of means-tested benefits; hence poor people no longer have to suffer the routine hassle and indignity of having to ask the government for handouts on a regular basis (Mirrlees et al, 2012). The integration system is used to simplify the tax payment and benefit withdrawal by individuals so that they can sufficiently increase their trust for the state and belief in the system, hence increasing their compliance. By integrating the individual components of tax systems and benefit systems, integration simplifies the entire tax and benefit integration system. The purpose of doing this is to bring two main benefits to the tax payers, benefit claimants and the state. These two benefits are reduced administration and compliance cost, and greater transparency in the tax and benefit systems. Transparency in the integrated system is aimed at producing a convenient standpoint for the combined tax and benefit rate schedule. Combination of the two systems makes the combined rate schedule to be more sensible and straightforward (Mirrlees et al, 2012). The differences that exist between tax and benefits systems make the integration of the two systems fundamentally necessary. Merging the two systems eliminates the differences and makes the system stronger. This serves administrative simplicity and transparency within the integrated system. Integrating the two systems also serves to achieve a sensible structure for the entire system. For instance, integrating several means-test tax systems with several other benefit systems may bring about more effective tax and benefit rates for the people. The integrated system also gives makes people to know what they are entitled to and what they are obliged to pay, hence giving them an opportunity to plan effectively for their spending and earnings. As already mentioned in this paper, the main purpose of tax-benefit integration system is to enhance administrative simplicity. This means that the integrated system reduces the complexities of the existing independent systems, hence increasing the ability of individuals to plan for their lives and make informed decisions in advance. The state also finds it easier to plan for its benefit and taxation activities with a more integrated system. 4. Strengths and weaknesses of the integrating tax and benefit systems Like any other fiscal approach, integration of tax and benefit systems have both its own weaknesses and strengths. In this paper, the weaknesses of the integrated system will first be integrated before the strengths are looked at in depth. One of the weaknesses of integrating tax and benefit systems is that the two systems lack a common basis; hence the implementation of the integration process is difficult. While income tax is based on individual income, assessment of benefits and tax credits are based on the joint income f couples. This means that a combined or integrated system which cannot have both bases at the same time will be difficult to implement. The second weakness is that the two systems – tax and benefit systems are assessed on two different time horizons. Income tax depends on individual’s actual annual income while benefits are assessed on a shorter time horizon, usually on a weekly basis. The UK attempts to give tax credits to low income earners on short time period basis while at the same time responding to changing circumstances. This trade-off makes the integrated system difficult to operate. The strengths of integrating the two systems are basically the administrative simplicity effect associated with the integration. It is clear from previous discussions that the integration of the two systems makes administration of tax and benefit systems to be simpler and easier to operate by both the low income and high income earners as well as both the tax payers and the benefit claimants (The Guardian, 2012). In most cases, one individual is a tax payer and a benefit claimant at the same time. Integrating the tax and benefit systems is a sure way of making it easier and more convenient for such individuals to pay their taxes and withdraw their benefits. The second strength of integrating the two systems is the rate schedule transparency associated with the integrated system. The rates that are applicable in an integrated system are transparent and basically appropriate for the elimination of bias and prejudice within the system. 5. Potential winners and losers of the integration of the two systems Integrating the tax system and the benefit system has various benefits to all parties involved in the system. However, some individuals or groups are bound to lose more than others while others are gain. For instance, low income earners are more likely to gain from the system. This is because the transparency associated with the integration will give them an opportunity to plan for their tax obligation and their benefit claims (Sims & Econometric Society, 1994). It also enables them to reduce the costs and time spent on processing the taxes and benefits separately, given that they earn low income in the first place, so affordability of processing the two systems may be low. Low income earners will also be able to know what they are entitled to and be able to plan well for their lives and earn enough confidence in the system. Another group of gainers from the integration of tax and benefit systems is employees. It is clear from the above discussion that the integrated benefit and tax system enables the tax and benefits to be merged as additions/deductions from salaries by employers to employees. This shows that as the tax and benefits are deducted or added to employees’ salaries, the employees do not have to face the hassle of having to pay for the taxes and withdraw benefits separately on their own. This process also reduces the costs of carrying out tax and benefit transactions. The losers of this system are the taxing and benefit-paying authorities, i.e., the state. Although the state will reduce its administrative costs by implementing the integrated system, the transparency required of the system will impact negatively on them. Governments perceive that lack of transparency in tax and benefit systems has a positive impact on them. This is because transparency requires a lot of processes and costs which are incurred by the state. Transparency comes with its own costs and the government has to pay for it. References list BBC 2012, Modernization of the UK Tax and Benefit System. Accessed on March 14, 2012 from http://www.bbc.co.uk/news/business-11717254. BBC News 2012, News Report Explaining the UK Benefit System. Accessed on March 14, 2012 from http://www.bbc.co.uk/news/business-11717254. Great Britain, 2008, Health inequalities: Written evidence. London: TSO. Haan, P & Myck, M 2006, Apply with Caution: Introducing UK-Style In-work Support in Germany, Deutsches Institut fu?r Wirtschaftsforschung, Berlin. Lelkes, O & Sutherland, H 2009, Tax and benefit policies in the enlarged Europe: Assessing the impact with microsimulation models. Ashgate, Farnham, Surrey, UK. Millar, J., & Social Policy Association (Great Britain) 2009, Understanding social security: Issues for policy and practice, Policy Press, Bristol, UK. Mirrlees et al. 2012, Integrating Personal taxes and Benefits, Nuffield Foundation, London, UK. Mirrlees, JA & Institute for Fiscal Studies (Great Britain) 2008, Tax by design: The Mirrlees review, Oxford University Press, Oxford. Myck, M & Reed, H 2006, Tax and Benefit Reforms in a Model of Labour Market Transitions, Deutsches Institut fu?r Wirtschaftsforschung, Berlin. Sims, CA & Econometric Society 1994, Advances in econometrics: Sixth World Congress, Cambridge University Press, Cambridge, England. The Guardian 2012, News report relating to benefit fraud and error. Accessed on March 14, 2012 from http://www.guardian.co.uk/society/2012/jul/12/benefits-system-error- unacceptably-high. UK Government 2012, Quick Answer: How and when your benefits are paid. Accessed on March 14, 2012 from https://www.gov.uk/how-to-have-your-benefits-paid. Read More