Current Changes in Taxation System - Essay Example

Taxation Introduction Currently, modern economies cannot operate without tax systems that increase huge quantities of revenue to pay for public amenities and critical services. Most take in abundant of 31 per cent of national revenue in form of tax. Some may even grab approximately half in that such tax systems can be designed in aspect of immense economic welfare. Yet persons involved in making policy never step back to take into consideration this design of their national tax framework in general. Public knowledge of taxation is scarce. And the politics and general analysis of the tax design is not adequate (Adam 2005, p.7). A Description of the Current System (Taxation of Household Savings) Taxation of household savings is really critical to the economy of UK. A look into the current tax system in the UK is hence crucial. This book tax by design is hence a crucial and explanative way of approach in this matter. The motive is to find out the core aspects on which a twenty first century tax system can be based on and then use them in making applications in advocating stringent policy enforcement to make improvements to the United Kingdom tax system. To that end, aspects relating to economic theory and vital studies can be used to explain the effect of the tax system on persons traits and the outcome tradeoffs which people who make policies have to do between the numerous and conflicting goals which they can aim for the tax system to attain (Adam 2005, p.19). This is essential since household savings is critical in any worker’s lifetime. In doing this, we follow in the trail of the Meade Report which concentrated on the framework and reform of tax and has been critical in the dynamic issue of taxation policy in the UK. Moreover, the canvas is broader than expected, covering most of the tax system and certain areas of relationship with the social security and credit systems which can be affected by taxation. Neutrality on financial and human capital investments (Some Tax) Persons do not only have the choice in financial assets. They could also invest in their self human capital, that is, knowledge and expertise. Such investment shall earn a return in the long term, just as savings could earn a return. There is no specific motive why we can wish to interfere with persons decisions between these two types of investment. In certain scenarios, a savings neutral treating of human capital may take place in a fairly natural manner. Moreover, no tax can be charged at the time the investment takes place (Adam 2005, p.28). The return can be taxed only when revenue from the investment can be earned. Savings-neutral taxing of financial investment can then make things even bad, because choices to human capital investment that reap early returns become even more lucrative. This can lead me to choosing an occupation with huge returns up front rather than investing in a long term lifetime career which comprises human capital investments. Furthermore, the complication of borrowing against possible revenue capacity implying that, in reality, it is hard to make sure full neutrality between human and financial capital. The expenses of education and human capital investment can also be wholly deductible for tax motives. But several of the expenses of human capital investment are hard to measure. If it is difficult to avail a tax savings treatment which does not interfere with the decision between human and financial capital investment, some tax of the normal non-risk income from financial capital investment maybe worthwhile during taxation of household savings (Ainslie 1975, p.37). A Description and Explanation of the Type of Potential Winners and Losers of Such a Move In any economic system where taxation can be involved, there are those who benefit and there are those who lose. Lawmakers, accountants and politicians all are affected one way or the other concerning the matter relating to taxing of household savings. Identifying the usefulness of law, accounting, politics and other techniques, we nonetheless approach such problems via the economic point of view. This gives us with a structure which permits us to make an inquiry. Questions can be raised on what we are trying to attain, concerning the structure of the tax system and how it impacts on person’s traits, and the economic expenses and advantages of specific policy decisions (Brewer 2010, p.3). Also the knowledge of those who benefit and the losers can also be asked. The tax system can be both huge and complex. Legislation relating to tax in the UK goes past eight thousand pages, and the books which lawyers and auditors utilize to make interpretation run to tones of thousands of words. Being at a confrontation with such a huge size and sophistication, we try to be as in-depth in the explanations and recommendations as it is essential to direct actual policy choices, without being interlocked in the undergrowth which can be understood only by experts in this field. This implies that there can be always be more places to analyze and complex unique cases to make a consideration on. But these complex cases cannot steer the general design of this tax system, even if they require to be absorbed by it. Purpose for Providing a Tax System with a Neutral Treatment of Life-Cycle Savings for the Vast Majority of Taxpayers The taxing of savings plays a key role in how economists make evaluation of a tax system and structures. There are five motives and explanations for this. Firstly, the manner in which savings can be taxed is a critical trait of the tax base. If the tax base can be defined as inclusive of revenues from savings as well as labour incomes, and all elements of the tax base being equally taxed, this results to what can be referred as the comprehensive revenue tax (Heady 2010, p.24). Nevertheless, if the incomes can be saved, and the returns to savings cannot be subjected to tax till such period as they can be utilized for consumption, then the resultant tax system can be called the consumption tax. The variation in the tax subjection of savings is the major variation between these two tax bases. Secondly, the treating of taxation on savings is a vital factor of the level in which the tax system identifies interpersonal variations in lifetime revenues, as opposes to annual revenues. Criticaldesign of the treating of tax savings is a major way of striving to marry the burden of tax on taxpayers with nearly same lifetime revenues but different revenue trends over their lifetime period. Thirdly, taxing of savings remains at exactly on the border between taxing of personal revenue and taxing of firm revenues. The way we tax savings can impact on the traits of small companies and the self-employed persons, as well as the sharing of capital to huge companies. Fourthly, taxing of savings may impact on both the aggregate amount of savings in the country and thus more vitally, how those savings can be shared across varied assets (Loutzenhiser 2007, p.40). This review makes an examination on the economic issues for varied possible structures of taxing of savings. Here we relate on specific channels for reforming as based in the UK context. This is vital in comprehending what we may need to attain via the aspect of taxation. For instance the case for exemption of the return to savings from being taxed can rely on, among other aspects, the motives which persons save in the first scenario. A large number of individuals do so in order to make consumption at one point of time of their lifetime rather than another (Ainslie 1975, p.68). It can be explained by these and differing to them with some of the complications evident in a comprehensive revenue tax and with the extra interference (Akerlof 1978, p.36). For instance, over if returns to savings can be taken as revenue or capital benefits, which can be unavoidably, be slotted in by such a tax system. Despite of an immense framework of study on the proper taxing of savings, we identify at the onset that economic theory cannot give an undisputable recommendation on the problem of a balanced tax design. The taxation of household savings hence relies on suitable conceptuality relating to neutrality of tax in making several critical analyses on this issue. Neutrality can be observed as a key platform in comprehending the problems involved in the designing of taxing of savings. There is a potential rich number of ways in which persons may be different in relation to saving traits that can be based on evident tastes, choices and needs. Nevertheless, it seems realistic to commence from this view point and observe for justifying and staying clear out of it (Altshuler & Auerbach 1990, p.69). The Strengths and Weaknesses of the Proposals The proposals given in this review also have their strengths and setbacks as a whole. A vital variation between such systems from the point of observation of persons may arise when revenue tax can be considered to be progressive or generally when persons need to face varied marginal tax charges at varied period during their lifetime. Then the varying structures can have differing influence on persons desire to save in accordance with the trend of their revenue and consumption over the duration. One possible factor that can be examined is permitting persons to decide between the differing systems and hence to smoothen their tax revenues between certain times. In some instances, that may steer us to the idea of lifetime revenue taxation. A consideration on taxing of savings, it is also vital to taken into account the taxing of borrowings and the taxing of human capital. This can be considered to affect the savings in a negative manner (Andelson 2001, p.81). Therefore, if investing in finance and investing in the future via education can be taken variedly, then decisions can be interfered across such lengths. Proposed Recommendations The basic role that has been fixed is to cite out reforms which would enable the tax system and structures to be more effective, while increasing nearly a similar amount of income of the system and while make a redistribution of resources to persons with greater requirements of lower revenues to nearly the same extent. The motive is not to attain textbook neatness for its own mandate, but to unravel key potential welfare benefits (Browne 2010, p.13). To the level that such benefits pop up as greater national revenue, they can also permit the government which attains them to male loose the prohibitions under which the tax systems are operational. This implies, to spend more on public amenities or make redistribution more by not reducing tax revenues in total. Tax systems reformation cannot be considered to be that easy, but it demands that the ambition of crucial economic benefits and hence the urge of improved living conditions in the long run. The tax system and structure must have an adhesive framework based on clearly outlined rules and regulations based on the dynamics of economics, such as those laid out in this review. These should be a comprehensible aspect of the perfect structure in that the numerous dimensions fit correctly together and from which unexpected interferences can be done away with. Making progress towards a stringent tax system such as this can be essential at any period. It is evident to be even more meaningful when the tax structure requires carrying out more complex tasks (Adam 2005, p.114). Conclusion The tax systems play a key role in all current economies around the globe. Taxes can cater for about 31 per cent to 52 per cent in most developed countries, with the United Kingdom in the midst of this analogy. The manner in which such great sums of revenues can be raised is of concern immensely for economic effectiveness and for equity. As many developed economies stand to analyze fiscal deficits by collecting more revenues via their systems and structures, the benefit of making the system to work properly is also of the essence (Apps & Rees 2009, p.107). References Adam, S. (2005), ‘Measuring the Marginal Efficiency Cost of Redistribution in the UK’, Institute for Fiscal Studies (IFS).Working Paper 05/14 (http://www.ifs.org.uk/ Publications/3399). Akerlof, G. (1978), ‘The Economics of “Tagging” as Applied to the Optimal Income Tax, Welfare Programs and Manpower Planning’, American Economic Review. Ainslie, G. (1975), ‘Specious Reward: A Behavioral Theory of Impulsiveness and Impulse Control’, Psychological Bulletin. Altshuler, R., and Auerbach, A. (1990), ‘The Significance of Tax Law Asymmetries: An Empirical Investigation’, Quarterly Journal of Economics. Andelson, R. (2001), Land-Value Taxation around the World, Oxford: Blackwell Publishing. Apps, P., and Rees, R. (2009), Public Economics and the Household, Cambridge: Cambridge University Press. Brewer, M. (2010), Couple Penalties and Premiums in the UK Tax and Benefit System, IFS (Institute for FiscalStudies) Briefing Note 102 (http://www.ifs.org.uk/publications/4856). Browne, J. (2010), ‘Redistribution, Work Incentives and Thirty Years of UK Tax and Benefit Reform’, Institute for Fiscal Studies (IFS), Working Paper 10/24 (http://www.ifs.org.uk/publications/5367). Heady, C. (2010), ‘Taxation in the UK’, in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds), Dimensions of Tax Design: The MirrleesReview, Oxford: Oxford University Press for Institute for Fiscal Studies. Loutzenhiser, G. (2007), ‘Integrating Income Tax and National Insurance: AnInterim Report’, Institute for Fiscal Studies (IFS), Working Paper 07/21 (http://www.ifs.org.uk/publications/4101). Read More