A Good Tax System for an Open Economy - Essay Example

TAXATION + submitted Taxation Economic study on taxation has played a significant in improving the financial system of a nation. This research details the study of taxation relating to savings within a given unit. In addition, taxation and savings plays a fundamental role in economic assessment. Furthermore, savings taxation has impacts a person’s decisions relating to saving and risks connected to that saving. In accordance with the above, taxation entails means by which regime finances its expenses by imposing charges on populaces and commercial entities (Diamond 2011, 332) Furthermore, taxation acts as a technique or tool by which a regime discourages or encourages some of the monetary decisions within the nation. For example, government can come to a decision to impose lofty tax on illegal business to assist discourage the investors from venturing into the enterprises. Further, tax treatment plays an imperative role in determining to which scope the scheme appreciates inter-personal differences in lifetime proceeds. Thus, the procedure of taxation influences the conduct of small enterprises and allotment of resources to outsized firms. In relation to this, vigilant blueprint of savings and taxation leads to equalization of tax load in taxpayers with identical lifetime incomes (Blank 2004, 26). Relating to household saving, populaces save when the sum of money they desire to consume is dissimilar from the income they obtain. For example, some people may find expenditure smoothing hard to attain particularly if they have little returns. Therefore, decisions made by people relies less on long-term philosophy and more on aspiration for immediate indulgence. Finally, populaces save less when they earn smaller amounts yet have high needs. Additionally, due to poor rationality, there is a driving power to the government to build up savings, pensions, and public insurance. Regarding above, taxation consequently directly affects the wellbeing of people predominantly during the periods of joblessness or sequestration. Thus, in order to a faultless tax system, the government should rely broadly upon concepts like tax neutrality in order to structure its assessment (Diamond 2005, 99). This paper provides characteristics that will be able to identify a good tax system for an open economy and particularly suggest how the United Kingdom tax system should be reformed with the aim of making it ideal. The Mirrlee review was as a result of research that was carried by Sir James Mirrlee and his associates with the aim of analyzing and coming up with a conclusion that would influence the tax policy in the United Kingdom. The review came up with frameworks that highlighted the proposals of some of the important features. This features included characteristics of a better tax system that described the process that should be used to access the current system of taxation in the United Kingdom (Mirrlees 2011, 21). It also gave packages of reforms for the United Kingdom system that will move it closer to its ideal if they were proposed. Another vital thing was how the transition and practical implementation of the reformed packages would take place. In every economy today the tax system plays a major role. In most developed economy tax is responsible for about 30%- 50% of the national income (Blank2009, 28). The United Kingdom is one of the developed nations that have its range of national income between 30%-50%. Current Systems Tax systems should be structured to meet the overall spending needs. There is a need to avoid allocation of revenue for some particular purposes. Spending on some items need to be tied to receipts from \the receipt. Some taxes do not need to be addressed just because there is a need of going green, tacking the climate change as become a way of increased taxation. Overall tax system does not mean that all tax be progressive, the main tools that should be used to achieve the most desired progressive and other aspect of tax system is the focus of achieving efficiency. According to the research that was conducted by the Institute for Fiscal Studies show’s that taxation is unjust and very discriminative since taxation is not progressive to the overall system. Important taxes should be imposed on goods such as alcohol and cigarette and other activities that negatively affect the environment. This will be beneficial to the economy since people who are using such substances will avoid this behavior that harms their lives. In this matter taxation will be very helpful in a way that the society is encouraged in changing it’s the norms of its individual. This argument is based on health caution so it very advantageous. There role of primary rate schedule for personal taxes and benefits that are achieved progressivity has to be emphasized. This is an inevitable aspect of trade-off between work incentives and redistribution. There is no sense of taxing the rich or increasing the wages of the poor without affecting the behavior, but there is a way of designing the tax system without negatively affecting the efficiency loss that are associated with achieving progressivity. Due to this then the there has to be a rate schedule that reflects on the facts that are based on the shape of the income of distribution and how the people will respond to the benefits that are associated with different levels of income. This will also determine the decision of the people retirement time, it will also implies on the effort a person in work and consideration of other aspect such as migrating ad tax avoidance. There is a sense of designing the rate of schedule that will take of observable characters that are reflected are labor supply incentives and potential earning power and needs. There should be limits of how to tax the face of lower effectives so that there benefit from the pay and not to constitute unfair and unjust discrimination. Since many people would like generosity to be stretched to them, this can create some undesirable incentives in order for them to get the benefits. There will be tension as people will be seeking neutrality. When designing a tax system, the type of progressivity has to be analyzed well. The effects of taxes on the people should be determined by their current incomes, this is very ideal while trying to access the progressivity of the tax system given the kind of lifestyle the people are living. A way of considering this is by look at the distribution of the expenditure and not only looking at the distribution of income. There can be similarity between lifetime income and lifetime expenditure but there might be a difference between the annual income and annual expenditure. This is due to the borrowing and saving that people may be reflect to the fluctuation of income and the other thing may be varying human needs in the life cycle. In this case the absence of the perfect measure of lifetime resources and sort term measure of income and expenditure will be the complementary indicators that will be determine the lifelong resources and should be considered when combining both the lifelong measures and short time measures. The other consideration that should be looked at is the constrain of how people borrow will be making a snapshot that will show the relevance of the current income between them. Recommendations In order for people to benefit from the personal tax then the system has to be progressive, coherent and they should be designed with aim of reflecting the shape of income distribution between the different groups that are responding to the work incentives. There is some coherence which is very important respect yet they are missing in the United Kingdom system. The first structure that is lacking in the United Kingdom system is the welfare of benefits. This structure is absent to people who are working and those that are not working, this is a complex issue that imposes considerable administrative and psychic costs that are responsible to the building numerous benefits within different administrative systems, income definitions, bases of assessment. The structure that is currently in place that entrusted with offering multiple benefits to the people with an array of overlapping states that the this test will leave some people to face the effect of marginal tax rate(EMTR) that will exceed the 90 percent mark (Blank2009, 28). The complexity of this structure shows that there is inequality and inefficiency and therefore this structure should be simplified and integrated so that it meets the people income level. Though the United Kingdom government has embarked on similar reforms, though the Review does not recommend the integration between the tax and welfare systems, it advocates for the difference in the periods of assessment, the weeks or months for benefits in a year of taxation and the unit of assessment such as household for benefits or the individuals for taxes. The other important aspect is taxes on earning lack basic coherence in two major ways. The first aspect is the pattern used of marginal income tax rate that is very difficult to rationalize, for instance, if the marginal rate rises from 35 percent to 55; percent at the rate of 100,000 Euros of income then it again falls back 35 at the rate of 112,950 (Blank2009, 28). This will prove to be difficult to determine the tax rate. The other notable aspect that is more important is the separation system of the National Insurance Contribution. The effective separation of two taxes on the same earning with different sets of rules and exemptions, can pointlessly increase the administration and compliance cost, this will not give the transparency of the National Insurance Contribution. The NIC is left with the task of linking the contributions that are paid or received; NIC is just another body of earning tax that invites the politicians to play games with the people through the current system without the acknowledgement of the essential structure of the taxation of the labor income. The review therefore has proposed the two structure o merge since they are using the same fate schedule in incomes from all sources. The fact that makes the NIC to be partially different is that the schedule rate is not applied to the self-employed income group, this is the main issue that is most frequently dealt with in an incentive to disguise labor income. So integration would prove to be a better opportunity that will effective in the broadening the base of the NIC in covering the self employed and the capital income in full. For the National Insurance Contribution to alignment rate of the employees must include income tax or an equivalent tax that would be levied on the non-employment income. This Recommendation by the Review would not be implemented easily due to the political interest. Though the tax system has many limitations in the current system of the United Kingdom the Review recommended that it was essential for the government to have a tax system since it play a very vital role in the economy. The aspect that was neutral in the absence of a strong backing to suggest its alternative policy and also to broad application that will consider tax incidence question in a life-cycle setting of saving for the vast majority of taxpayers. This is based on the structure of the income tax and the VAT Tax will show particular the trade-off that is between the breadth, the base and the level of the rates that are close to the universal challenge in tax design (Goolsbee 2000, 39). With a stable tax rate, people are able to be given a stream of allowances annually under the second approach that has the same present value that will serve as the up-front of the deduction of the first approach. This approach are very important in resolving the conundrum that has prove to a big problem to many policymakers, it will also ease the tension between preventing tax avoidance that is on one hand and minimizing disincentives that would otherwise save and invest on the other hand. Taxation is a vital aspect that tries to bring neutrality between different forms of saving and investment with the one general aim. This may prove to be to be very effective in the case of treating a pension saving to be so generous. It will be very good for a person since it has rationalized the benefits that are entitled for an individual (Diamond 2009, 83). Those individuals with inadequate retirement savings may also benefit from this program, thus it is very encouraging to for an individual to save in a pension while e is still young. In my opinion I see that taxation is very important aspect in an institution. It will help the government check on the goods that are harmful to the people such as cigarettes and alcohol, by highly taxing such commodities, consumers of such commodities will shy off hence there health status will not be affect (Rogerson 2009, 32). The other important issues is that, through taxation people will be able to save so even after retiring from work they will not depend on the government for aid from time to time. This is due to the pension benefits hat all are entitled to, even if an individual did not save much during his working time they are able to benefit through the pension system. The negative side of taxation is that it tends to take money from the poor and give it to the rich. The other thing is that if it is only effective to the people who are working those without jobs will not get benefits from the tax system. Generally the winners or the people who are most likely to benefit from taxation are the firms, investors, nations, and the people who are highly ranked in the organization. The losers of taxation are the lowly ranked personnel in the organization and the unemployed persons. Indeed, the Meade and Mirrlees reports have a lot in common. Both take an expansive view of issues and are resolutely grounded in financially viable theory. Both review teams have amalgamated the contributions of leading scholars with those of upcoming, younger researchers. Both lay bare the value in this politically sensitive ground of an autonomously financed inquiry. There are also significant differences. One is scale. The account of the Meade Committee was contained in a single volume while Mirrlees Review has two substantial volumes with a total of 1,880 pages. This is virtually a quarter of the length of UK principal tax legislation (Blank 2008, 22). A second vital distinction arises from the fact that unrestricted economics has moved on. The Mirrlees review focuses heavily on pragmatic findings, reflecting the upheaval in public finance achieved through rigorous use of micro-data and the progress of micro-econometric procedures. The 2 volumes fashioned by the Mirrlees Review offer valuable policy scrutiny and reveal the vigor of modern public economics. They are praiseworthy successors to the Meade Report and signify a new landmark in the discipline. At the same time, reading of the three topics considered here is that public economics has moved towards becoming separated from other branches of economics such as trade organizations and labor economics. This also applies to its alienation from other disciplines such as ethical psychology and philosophy. Bibliography Blank, R. M. (2009): “What We Know, What We Don’t Know, and What We Need to Know About Welfare Reform,” in Welfare Reform and Its LongTerm Consequences for America’s Poor, ed. by J. Ziliak. Cambridge, U.K.: Cambridge University Press Diamond, P. (2009), ‘Income Taxation with Fixed Hours of Work’, Journal of Public Economics Goolsbee, Austin (2000). “What Happens When You Tax the Rich? Evidence from Executive Compensation” Journal of Political Economy Mirrlees, J. et al (2011), Mirrlees Review: Vol II: Tax by DesignOxford University Press, ISBN 978-0-19955374-7, Oxford and New York, Rogerson ,R. & Wallenius, J. (2009), ‘Micro and Macro Elasticities in a Life Cycle Model With Taxes’, Journal of Economic Theory Read More