Tax System with a Neutral Treatment of Life-Cycle Savings for the Vast Majority of Taxpayers - Assignment Example

Evaluate the recommendation to provide a tax system with a neutral treatment of life-cycle savings for the vast majority of taxpayers (as described in chapter 13). Contents Contents 2 Description of the current tax system 3 Description of the proposed recommendations 4 Purpose for providing a tax system with a neutral treatment of life-cycle savings for the vast majority of taxpayers 5 Opinion on the strengths and weaknesses of the proposals 5 Description and explanation of the type of potential winners and losers 6 References 8 Description of the current tax system The current system of taxation in UK and the rationale behind the design of such tax structure has been explained as follows. The global financial crisis and the world wide economic recession has reduced the earnings of the UK government as the tax receipts have been severely hit (Giudice, Kuenzel and Springbett, 2012, p.46). In the year of 2007/08 before the occurrence of economic recession, the UK government projected that the tax receipts would rise from 549 billion pounds in 2007/08 to 616 billion pounds in 2009/10. On the contrary, the tax receipts of the government reduced to 508 billion pounds in the year 2009/10. In order to restore the health of the treasury and the public finances, the government revised the tax structure which aimed at increasing the tax receipts from the public in UK. The income tax, national insurance taxes, value-added tax and the corporation taxes are the largest contributors to the tax receipts of the government (James, 2009, p.74). Thus the modification of the tax structure of UK has implications for the household savings and has affected the life cycle savings of the households. On the same lines, a new higher income rate of 50% has been announced for individuals with income level over 1.47 billion pounds. The tax structure has also removed the income tax personal allowance in order to make for increased payment of taxes by the government. The tax rates for National Insurance have also been increased by 1%. In order to reduce the impacts on the low earning class of people, the threshold for the national insurance have been increased. The tax structure has also abolished the reduced rate of value-added taxes that apply to the selected goods and services offered by the producers. The review of the current tax system in UK revealed that the tax structure is costly and not uniform in terms of lifecycle savings of the individuals. The current tax structure urges the individuals and the households to spend earlier in their lives rather than waiting for the later stages. The current tax system has been reviewed to find that it would lead to rising inflation rates in the economy. Description of the proposed recommendations The current tax system of UK has been reviewed to find that there are varying tax rates of 40%, 50% and 60% for people belonging to various income brackets. The increases in the income tax, national insurance tax, reduction of personal income tax allowance are measures that could excessively reduce the income levels of the economy and could also lead to higher rates of unemployment. Therefore, it has been proposed that instead of increase the income taxes and the rates for national insurance, a single and uniform tax rate should be implemented for all the people in proportion to their income levels (Mirrlees, 2011, p.285). It has also been proposed that the exemptions in the value added taxes should be cancelled. This would lead to the reduction of green house gases which were emitted through the use of domestic fuel. The proposed tax structure would uniformly raise taxes from all kinds of savings and investment activities and would lead to equitable distribution of taxes among the members of the society. The recommended tax structure also aims to address the distortion in the savings and investments caused by the increase in the taxes of national insurance (Lymer and Oats, 2007, p.84). The increase in taxes in the national insurance would lead the household to back out from the insurance and investment options and instead of savings or investing, the people would tend to spend early in their lives rather than planning for the later part of their lives. The non-uniform system of taxation in UK is likely to give rise to inflation. In this context, the proposed tax system is expected to maintain a parity between the savings and the expenditure that would lead to balanced economic growth taking due consideration of the inflation and probable unemployment. Purpose for providing a tax system with a neutral treatment of life-cycle savings for the vast majority of taxpayers The rationale behind designing a tax system that offers a neutral treatment to the life cycle savings to most of the tax-paying population could be backed by the supporting theories of taxation and the significance of maintaining a balance with the benefits systems. The tax systems design the governments are aimed at earning revenues from the public but at the same time, the tax structure should be designed considering the welfare of the people and the households in the economy. The governments should keep in mind that the households save a substantial part of their savings and these savings should be channelized by appropriate policies of the government in order to be able to attain sustainable economic growth (OECD, 1994, p.91). The theoretical background suggests that the tax system should be progressive and serve as the source of public finances of the government. However, in the process of deriving the funds for public finances, the government should look to ensure neutral treatment of life cycle savings of the vast majority of the tax payers. The tax payers should be viewed in an equitable manner so that the public pays taxes proportionately to the amount of income earned by them (Great Britain Treasury, 2012, p.57). The neutral treatment to the life cycle savings would help to maintain the balance between the income and expenditure and also ensure sustainable development of the liquidity that would drive the economic growth. The equitable tax system would restore parity between the economic investments in the economy and savings of the public and thereby would keep the rate of inflation under control. Opinion on the strengths and weaknesses of the proposals The proposals on implementation of a coherent tax structure in UK could have certain advantages as described below. The removal of the non-uniform taxes for various top level income earners would set the stage of equitable distribution of taxes among the households. The reduction of the taxes of the national insurances is likely to encourage the people of the economy to reduce their spending and engage more into insurance and investments. This would help to foster investments in the economy. The households would, therefore, be able to maintain a balance between the savings and expenditure in the lifecycle (Williams, 2014, p.1). While on one hand, this would serve the welfare of the majority taxpayers, an economic balance between the demand and the supply would also be restored on a continuous basis. The proposals of removal of the exemptions on value added taxes would raise the prices of domestic fuels due to which the consumption would reduce resulting in the reduction of green house gaps emission. The weakness of the proposal is that the UK government may not be able to earn desired tax receipts from the public in the long run. The government of UK would be required to take the burden of debt in the short run as the net tax receipts are likely to decrease in case of a uniform and coherent tax structure. This would expose the weakness of the government in engaging into the activities of public finance (Seely, 2014, p.1). The inability of the government to engage in public finance projects would affect the development of the economy. The tax system should also consider the aspect of socio-economic development of UK. Description and explanation of the type of potential winners and losers The proposed revision of the tax system in UK is supposed to have potential gainers and looser due to the changes in the existing tax structure. The people with the low income would allocated integrate benefits under the proposed tax structure. The reduction of the threshold of the national insurance would lead to more number of households apart from the middle and high income groups to engage in insurance and investments and obtain the tax exemptions. Apart from this, the middle and the high income groups would also engage in insurance and investment activities in case of reduction of taxes (Mirrlees, Adam, Besley, Blundell, Bond, Chote, Gammie, Johnson, Myles and Poterba, 2012, p.6). This would help them to distribute their savings through the lifecycle. The corporations would also be benefitted due to the incorporation of a single tax rate and no added tax payment for the return on investments. The society would also be benefitted due to the reduction of green houses gases on the account of decline in consumption of domestic fuel stimulated by the reduction of existing VAT exemption. The potential losers due to the proposed tax system would result into losses for the treasury and the government projects ion public finances. The earnings of the government would reduce as the savings would be channelized more into the insurance and investments in case of a uniform and reduced tax structure (Nuffield Foundation, 2010, p.1). The projects of public finances may be delayed and the public welfare activities of the government may slow down. References Mirrlees, J. 2011. Tax By Design: The Mirrlees Review. Oxford: Oxford University Press. Lymer, A. and Oats, L. 2007. Taxation: Policy and Practice. New York: Fiscal Publications. OECD. 1994. Taxation and Household Saving, Volume 81. Paris: OECD Publishing. Great Britain Treasury. 2012. Budget 2012. London: The Stationery Office. Williams, D. 2014. UK tax system is ‘costly and inequitable’. [Online]. Available at: http://www.publicfinance.co.uk/news/2010/11/uk-tax-system-is-costly-and-inequitable-review-finds/. [Accessed on 22 February, 2014]. Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G. and Poterba, J. 2012. THE MIRRLEES REVIEW: A PROPOSAL FOR SYSTEMATIC TAX REFORM. [Pdf]. Available at: http://ntj.tax.org/wwtax/ntjrec.nsf/0/3dfe19060c4da03f85257a6f0056127c/$FILE/A06_Blundell%5BF1%5D.pdf. [Accessed on 22 February, 2014]. Nuffield Foundation. 2010. Mirrlees review of Tax System. [Online]. Available at: http://www.nuffieldfoundation.org/news/mirrlees-review-tax-system-recommends-radical-changes. [Accessed on 22 February, 2014]. Seely, A. 2014. The Tax System. [Online]. Available at: http://www.parliament.uk/documents/commons/lib/research/key_issues/Key%20Issues%20The%20tax%20system.pdf. [Accessed on 22 February, 2014]. James, M. 2009. The UK Tax System: An Introduction. London: Spiramus Press Ltd. Giudice, G., Kuenzel, R. and Springbett, T. 2012. UK Economy: The Crisis in Perspective. New York: Routledge. Read More