Public Finance: Tax Reform - Essay Example

? Public Finance Would you move towards a consumption tax base, an income tax base, a combination? Tax policies are instruments utilized in levying taxes via imposition of different tariffs in order to apply the built policy. Through publication of annual finance act and the budget, the government can be able to achieve environmental and economic goals (McCluskey et al pp.4-5). Consumption tax may be levied on goods and services consumed .This system may affects consumers spending behaviors. On the other hand, income, tax deals with income from labor and capital. This means that the higher the level of income earned the higher the amount of taxation imposed. This system tends to reduce tax burden among low income earners, hence discouraging people to work hard. This is because capital taxation tends to discouraged savings among the members of the society (McCluskey et al pp.4-6). Additionally, income tax tends to discourage investments innovation. This in turns contributes to lower standards of living. On the contrary, consumption tax base, tend to eliminate saving barriers, leading to a more robust economy (McCluskey et al pp.4-5). Therefore, based on the above discussion, I would, prefer the consumption tax base having in mind that it is an indirect tax that people do not feel pitch of paying it. In addition, their benefit outweighs those of income tax based system (McCluskey et al, pp.4-5). 2. How do your proposals promote economic efficiency? Technical analyst asserts that, it is better to pay taxes when you spend it rather than when one makes it. This is because it helps at creating a level playing field, when properly constructed. For example, some necessities may be tax exempt or levied at a lower rate. In above connection, expenditure tax tends to bring underground economies to surface where everyone gets taxed. (McCluskey et al pp.4-5). Consumption income also encourage savings because people tend to save rather than spend, moreover consumption income promote investment and hence employment creation (McCluskey et al p.5). 3. What are the distributional impacts of your proposals? Empirical research indicates that resource redistribution from the poor to the rich had increased inequality on consumer disposable income. Whereby, the rich and the proletariats tend to have the same propensities. This implies that when proletariats reduce their consumption with a certain proportion, the rich increases their consumption with same proportion. In addition, consumption of low cost services and products tend to be heavily consumed as compared to expensive items (Alan.J and Auerbach pp.2-8). Connectively, the prices of ostentatious goods such; jewelries, fine wine, electronics and clothing are based on quality. Whereby when the prices of ostentatious goods increase their purchase increases progressively (Heathcote, Perri and Violante pp.4-5). 4. How do you weigh efficiency vs. equity? Efficiency is the optimal production and allocation of resources given the existing factors of production. Normally, it deals with future competence in the production of goods and services while strategizing at maximizing the total size of economic pie. On the contrary, equity refers to fairness and impartiality in distribution of wealth and economic resources. Therefore, efficiency is the economic pie, while equity is how that pie is sliced (Heathcote, perri and Violante, paras3-9). For example, if two firms with the same factors of production but one produces twenty percent goods more than the other, the firm with greater output will be considered to be more efficient because it tend to maximize resources (Heathcote, perri and Violante, paras3-9). On other contrary, equity focuses at ensuring fair distribution of wealth among the firm operating in the same industry. Additionally, greater economic equity may be achieved via provision of unemployment compensations benefits to the poor and dependent people. Connectively, high taxation tends to reduced efficiency substantially. This is because higher taxation reduces economic reward for working hard hence, reducing the overall purchasing power of the entire economy (Heathcote, perri and Violante, paras3-9). 5. What are the effects on government revenue? What are your considerations here (e.g. do you require budget neutrality or not? Revenue generation by the government forms a fundamental reason why government imposes taxation. This in turn enables the government to provide essential public necessities to promote social economic welfare. In addition, taxes transfers purchasing power from the member of the public to the government. whereby, giving the government power to control economic resources. Additionally, this transfer enables the government to provide goods and services needed by the society such; security, health education, other amenities, among others (Gendon pp.3-9).However, taxes imposed by the government tend to act as disincentives in consumption and production. According to the least allocation effect theory, the revenue effect tends to be effective when a tax is imposed to a wide range of economic activities (Gendon pp.3-9). Whereby, the governments prefer earning from income tax base as the best tax base for generating revenues, this because it has least significant allocation effect (Gendon pp.3-9). On the other hand, budget neutrality is a term applied in government laws it focuses on the effect that new laws may to the budget. It can be scrutinized some laws have an effect on the budget; this can either cause the government to incur additional cost or save some funds. On the contrary, neutral budget neither cost nor save the governments money and therefore, this substantiate why it may be required (Gendon pp.3-9). 6. How do your proposals affect administration of the tax code? Compliance? With consumption tax base that goes hand in hand with the value added tax it is proportional of consumption but can be regressive on income at higher income levels. Savings and investment becomes tax deferred until the consumption stage hence, making it to be progressive in nature. The consumption tax base may be more effective. Whereby, it can be applied at a point of sale, at this juncture every tax shall be captured, making it easier to administer it to the society (Atkinson p.590). Moreover, the tax rate tends to remain unaffected by the person who purchases it due to its varying nature on the type and quantity of goods purchased. Additionally, when consumption tax may be compared with income tax base whereby, significant reduction in administration cost may be detected. Connectively, it can be scrutinized that the government may spend less when using consumption tax base rather than when using income tax base. In above connection, the society may feels at ease of paying taxes if that that tax had been incorporated in commodity prices (Atkinson pp.590-592). 7. What happens to the tax treatment of different business entities? There exist four different types of business entities namely; sole proprietorship, limited liability companies, partnership and corporations. In sole proprietorship, incomes and expenses from the business should be added to the personal income tax return. Profits and losses prepared on a schedule should be added to the tax returns. Connectively, when a sole proprietor makes quarterly tax payments, an estimated tax payments to offset any tax liability should be made when the business makes over $400 per year (McCaffery and Edward, paras4-5). On the other hand, the tax returns for limited liability companies should be reported on individual tax returns of each partner (McCaffery and Edward, paras6). In the situation of partnership, “a flow through” may exist which implies that the entity does not pay taxes on its income but instead tax is paid by shareholders of the company. In such a situation, partners should pay taxes on their distributive share of the entity’s income. Whereby, the government requires this allocation to reflect on the economic reality of business arrangement. In addition, assets can be transferred out of the business to the owners without property disbursement taxes (McCaffery and Edward, paras5-6). On other hand, corporations should file corporate tax returns upon which firm should they pays a certain set percentage of corporate tax. The remaining net profit may be distributed to share holders as dividends or kept in companies account as retained earnings. Connectively, share holders earnings might be taxed on their earnings twice, both at corporate and individual level. In addition, corporate taxation has no self-employment tax, which results to tax saving (McCaffery, and Edward, paras7) 8. What are the potential political barriers to implementation? Consumption based taxation requires imposition of higher taxation rate in order to raise the same amount of revenue that could have been raised using income tax based. Whereby, consumption tax base include capital income. This in turn makes the proponents of income tax to be against it because it de-motivates people to work hard. Therefore, it may leads to an increase in the dead weight loss from the tax wedge on labor income. Additionally, consumption tax base makes the intuition unclear because it focuses on tax alleviation on the safe return to capital but not on economic rents (Greenspan,paras2-8).Additionally, consumption tax base that tend to have a high likely hood of raising less revenue than an income tax (Rousslang pp.281-91). Additionally, consumption based taxation tend to increase the burden to the average citizen because each item consumed tend to be taxed especially where there are no tax exemptions. Research indicates that excessive application of consumption base system may affect the economy by lowering the amount of taxes that can be collected when the economic activities decreases. This may be attributed to low purchasing power which in turn reduces revenues earned by the government because it tends to discourage consumers spending (Rousslang pp.281-91). Works Cited Alan.J and Auerbach.The choice Between Income and Consumption Taxes. University of California, Berkeley, and NBER. 30 April 2013.Web.6 May 2013. Atkinson A. B. Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ. 1977. 590- 592. Print. Gendon ,P.P. Value Added Tax Treatment Of Financial Services A Developing Country Perspective Rotman,J .L University to Toronto 2006 3-9.8 May 2013.Web.6 May 2013< < http://www.freepatentsonline.com/article/National-Tax-Journal/131234151.html>. Greenspan.A. Greenspan: Consumption Tax Could Help Economy" fox News. 3 March 2005. Web.7May2013.. Heathcote.J and Perri.F. "Assessing international efficiency," 480, Federal Reserve Bank of Minneapolis.3April 2013.Web.6May2013. McCaffery and Edward .J. How to Make the Tax System Better and Simpler.Chicago: University of Chicago Press, 2002 Print. McCluskey, William.J. Franzsen, Riel.C. D. Land Value Taxation: An Applied Analysis. Ashgate Publishing, Ltd. 2005.4-5 print. Rousslang.J.D. "Should Financial Services Be Taxed under a Consumption Tax? Probably." National Tax Journal 55, no. 2 (2002). 281-91 Print. Read More