Tax System and the UK Government - Assignment Example

Taxation Introduction Governments are able to run their day to day activities by use of money collected from households and firms. This money is collected via taxation. Taxation is mechanism by which the government finances its expenditure by imposing charges on citizens and companies (Salanie 2003). The main use of money collected through taxation by the government is to provide goods and services to the public. Taxes also pay for education, highway and public transportation and also retirement benefits. By use of taxation the government can either encourage or discourage certain economic decisions. When the government decreases its levy on goods, there will be a high consumption rate and more production by the firms. This decrease of levy on goods leads to increase in capital (David 1817). Corporations are also subject to taxation by the government. Corporations pay taxes to the government for services provided. Corporations fill out forms as required by the state laws and hence recognized by the government (Leandra 2002). It is the duty of the corporation to pay taxes to the government for services provided and failure to do so can lead to legal actions towards the corporation. Before investors make an investment plan, they identify the tax system of their investment location. A tax system that is negatively designed does not favor the investor’s interests and will drain their resources and time. The different types of taxes levied by the government are indirect taxes, direct taxes, progressive taxes and non-progressive taxes. Generally, this paper will look at UK tax system and also recommendations made in the Mireless review. The paper will also explain the benefits that will come with the proposed recommendations and also the parties that will be affected by the recommendations. Tax system in UK today The taxation systems in UK today do not favor the households. It oppresses them through the heavy taxes that are imposed on them by the government. The taxation system has influenced the amount of money that people save and the manner in which they do so (Stuart, James and Christopher 2012). This system does not lead to economic growth since people are not encouraged to save. It has led to inflation in UK hence calling for reforms in the taxation system. The United Kingdom’s tax rate is among the highest in the world. Despite people earning high incomes, they have been subjected to high tax rates hence little savings by the income earners. A high increase in income tax has also led to the rise of other related taxes such as taxes on allowances, reliefs and national insurances. This has led to income earners taking home less money than they earn compared to other countries with different taxation systems (James 2012).Despite the high income tax rates in the UK, the low income earners from other countries views it fair for the form of taxes that are imposed since it equalizes both the high income earners and the low income earners. Income taxwhich contain allowances is also liable to taxation. The personal allowance is deducted from the total income before tax to give the taxable income. The national insurance contribution is also another type of income tax which is subjected to workers to cover for their social security. Workers who are liable to sickness are covered by this insurance policy. However, the tax that is imposed on this allowance is not equal to the amount of premiums that the insured person pays. The national insurance contribution tax should be aligned with the income of an individual. In the 1990s, the treatment on couple’s income was treated separately from that of the partner. The husband’s income has been deemed separate from that of the wife and the treatment on their income is different. There is the inclusion for the couple’s allowance which is availed to either the husband or the wife. This allowance is not provided for the unmarried couples. The UK system has tried to support the children rather than the married. The child tax credit and the work credit tax provides support for children from low income families. The work tax credit does not consider whether the family has children or not. Income tax, VAT and the National Insurance contributions are the largest sources of revenue for the UK government. The UK government should design an optimal tax design that serves well both the interest of the government and the income earners. Proposed recommendations on taxation in UK. The UK government is aiming at creating a conducive condition for private sector investment. This will enable its economy to grow and also raise the standards of living for the people through reduced taxation rates. A good tax system should be simple, stable and transparent. It should favor the government interests as well as those of the taxpayers. The tax design should also create a balance between the income earned by the person and the tax that is imposed on the income. To achieve this in the UK, there were several recommendations that were proposed and would see the tax design in UK become stable and favorable for all. One of the proposed recommendations is the design of a tax system that will help to raise the government revenue without maximizing the economic inefficiency. The tax design should not favor the government interest while leaving out the interest of the tax payers. The interest that is imposed on taxpayer’s income should be reasonable and it should be taxed at a reasonable rate. The high income earners should not be taxed equally as the low income earners. This will create inequality among the citizens of the country. Taxation of income earners in accordance to the income that they earn will help avoid economic distortions. Economic distortions can be reduced by imposing optimal tax on a commodity (Auerbach & Hines 2002). According to Mirrless review another proposed recommendation is the development of a tax design that will help to reduce illogical tax treatment on different assets of the income earner. In UK, earners income is taxed hence reducing his or her income rate. This reform aims at exempting the normal return on savings from taxation as much as possible. The reform agitates for the taxation of only the excess returns that the taxpayers earn. The current tax system in UK treats harshly the assets that are very important to the individual. This recommendation will help relieve taxes on return savings earned by the taxpayer. Taxation on the taxpayer’s savings can lead to a fall in labor supply in a country. Another proposed recommendation is to impose value addedtax (VAT) to all goods and services. By applying zero rates and reduced rates to different goods it will lead to the VAT system creating administrative complexity. This is because of unequal treatment of consumers who have different tastes and preferences to the goods being provided to them. Use of VAT is a poor choice to use to achieve redistribution. Broadening the VAT base to include the goods that are currently subjected to reduced rate will enable the government to raise revenue from the population efficiently. VAT should be applied to goods and services in a standard way and hence the government should search for the way forward. It can decide to extend the VAT to the imports and also at the borders. This will help the government to reform its tax system since imports are vulnerable to tax avoidance. However, as the government aims at imposing VAT on the good, the tax that it imposes should be equivalent to the service or good offered. Another recommendation is the imposition of taxes on environmental damages. Industries that release harmful gases to the atmosphere should be taxed for the effects they cause to the environment and the people living within the vicinity. The current trend of petrol and diesel taxation should be replaced with a national system that charges or imposes taxes on greenhouse gas emissions. Purpose for providing a tax system with a neutral treatment of life-cycle savings for the vast majority of taxpayers The government should tax people according to their lifetime earning capacity. If the government does not do so, it discourages consumers from the consumption of certain goods. This is because either the government overtaxes their income earners or it taxes their savings which they make a choice about when and on what to spend. A good tax system should aim at maintaining neutrality. In this logic, a neutral tax system does not distort people’s choice over when to consume their income. A tax that levies taxes on the normal return to savings does not maintain neutrality criteria. Many people strive to maintain a stable consumption level throughout their working life. However, this is not always the case because government policies do not favors the individual decision in saving. Sometimes the government taxes their income highly leaving them with little or no income to save. A decision should be made to avoid distortions to saving behaviors of the taxpayers. This calls for neutrality in taxation. Sometimes individuals and families find it hard to consume some goods due to the limited access to credit. In this case, they prepare themselves for the future. They save today to consume tomorrow hence there is no distortion to the time of consuming. A neutral tax system should therefore aim at minimizing the welfare loss that is associated with alterations in the consumer’s decision on when to use his or her savings. An example of a non-neutral tax system is the one that is found in the United Kingdom. The type of tax system that is found in in UK creates welfare losses due to the unrealistic taxes that are imposed on people’s income (Laura, Paul & David 2013). The purpose for maintaining neutrality is to help the consumers to understand the benefits and costs that may come with different tax policies that a government may impose. Strengths and weaknesses of proposed recommendations on tax system in UK The proposed recommendations on the tax system in UK will have a great impact to the government and to the taxpayers as well. It is of great importance that the recommendations be taken into practice because of the advantages they bring. First, the recommendations will help in tax simplification. The case of taxing even the savings of the taxpayers will be solved if the recommendations are put into action. Tax simplification will enable the government to pursue its interests to collect taxes from the citizens and the citizens on the other side will feel that the tax being imposed on their income is not heavy (Simon and Alison 2008). Therefore tax simplification laws are crucial in that they will favor both the government and the taxpayers. Taxpayers will have more income hence a high saving for the future. Secondly, the proposed recommendations will help in the compliance with the taxation laws. If the environmental taxes are incorporated as per the recommendations, then the industries who aim at maximizing their personal utility without caring about the effects that the greenhouse gases bring to the environment will be forced to comply with the states laws on pollution. They will have to comply with the state laws on environmental taxes without being forced to do so. Moreover, there will be compliance to the taxation laws because individuals and organizations would not withstand incurring compliance cost due to their negligence to pay taxes. Thirdly, the recommendations will help to achieve redistribution efficiently. This is because the recommendations will help to understand the shape of income distribution and will be able to judge how people are going to respond to various taxes. The recommendations will also allow room for more investors to invest in different projects. If taxes are stabilized, there is no doubt that investment will increase because the investors will be assured of a good return from their investment projects. Investors will always locate their business in an environment that assures them of high profit returns with minimum expenses in the long run. Despite the advantages that the proposals may bring to a country, there are also some weaknesses that may come along with the recommendations if they are put into practice. One of the weaknesses of the proposed recommendations is the decrease in government revenue. The recommendations agitate for a reduced tax rate on their income. If the government reduces the rate of taxation on income earned by individuals, it means that there will be a decrease in government revenue. This consequently leads to the unequal distribution of resources since the government does not have enough funds to provide wholly for its population. Potential winners and losers of proposed recommendations The implementation of the proposed recommendations will be beneficial to some parties as well as a disadvantage others. First, it will be an advantage to the taxpeyers.This is because the recommendations call for a reform in the income tax that is taxed the incomeearners. Reduction of taxes on income is will encourage the income earner to save. High saving rate will encourage high consumption in the future. The recommendations will also put the investors at an advantage because with the reduced tax rates, investors will be assured of a large profit from their investments. Moreover, therecommendations will be put the income earners at an advantage because of the equal distribution of the indirect tax on goods. VAT will encourage the income earners to consume goods because of the uniform taxation imposed on them. Despite the advantages of the proposed recommendations, they also put the corporations at a disadvantage. Business firms are at times highly taxed for the services rendered by the government hence their profit is minimal. Moreover, for firms that are involved in production of goods, environmental taxes will be imposed due to the adverse effects the production plant has on the environment such as release of greenhouse gases to the atmosphere. Conclusion For good governance, there should be a balance between the income earned by an individual and the tax that is imposed on an individual’s income. A government cannot be run without funds. These funds come from the citizens via taxation. However, the challenges to low tax bases in most countries are not based to the income earners negligence to pay their taxes. The major factors that contribute to low tax base I most countries is corruption. Most of the taxes that are collected in a country do not reach the state treasuries. This is because of fraud and tax evasions (Christian Aid 2008). Another problem that leads to a low tax base in most countries is the exemption to political and economic elites from taxation. People with liberal professionals such as lawyers and doctors are exempted from taxation. This brings inequality in taxation and leads to a low tax base (Bird & Wallace 2004). With a good tax system, the country not only develops economically but also establishes the country. A good tax system promotes the states legitimacy and democracy. A state where people feel that the tax system is favorable and equal to their income will feel free and will participate in the countries development projects.to conclude, the government should tax its citizens taxes that reasonable and not oppress them. This will give its citizen an opportunity to save part of their income which they later use to purchase goods and services. A high purchase on goods and services consequently leads to high government revenue because the goods are indirectly taxed. References Auerbach, A. J., & Hines, J. R. 2002. Taxation and Economic Efficiency. Handbook of Public Economics, 3, 1347-1421. Bird, R.M. & Wallace, S., (2004). ‘Is it really so hard to tax the hard-to-tax? The context and role of presumptive taxes.’ In J. Alm, J.Martinez-Vazquez & S. Wallace (ed.) Taxing the Hard-to-Tax: Lessons from Theory and Practice. Amsterdam: North-Holland. Christian Aid. 2008. ‘Death and taxes. The true toll of tax dodging.’ Report from Christian Aid David, R. 1817. The principles of political economy and taxation. Kitchener, Ontario. James, M., Stuart, A., Timothy, B., Richard, B., Stephen, B., Robert, C., Malcolm, G., Paul, J., Gareth, M., and James, P. 2013. Tax by design. Conclusion and recommendations for reform, 32, (3), p.331-359. James, H. 2012.Britains taxes among highest in world, accountant’s say. Retrieved from http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9654465/Britains-taxes-among-highest-in-world-accountants-say.html Laura, A., Paul, J., David, P. 2013. The Mirrlees Review: Tax by Design -Lessons for Middle Income Economies and the Case of turkey. Retrieved fromhttp://www.lacea.org/vox/?q=mirrlees-review-tax-design-lessons Leandra, L. 2002. Understanding corporate taxation. George Mason University Miller review. ‘The Taxation of Household Savings’ Retrieved from http://www.ifs.org.uk/mirrleesReview Salanie, B. 2003. The Economics of Taxation. MIT Press. Simon, J., and Alison, E. 2008. Developing Tax Policy in a Complex and Changing World.School of Business and Economics, University of Exeter Stuart, A., James, B., and Christopher, H., (2010).Taxation in the UK. London . Read More