International Taxation: Policy and Practices - Assignment Example

International Taxation: Policy and Practices Contents Introduction 3 Discussion 3 Canon of equity 4 Cannon of certainty 5 Canon of Convenience 7 Canon of economically efficient 8 Conclusion 9 References 11 Introduction Most of the developed and developing nations around the world practice effective tax policies that are applicable to their citizens and firms. Flat tax is one of these effective tax policies. Recently, the US citizens have raised their voices against the higher taxes policies. Over the years, they were significantly complaining that, the Democrat rule US Government is spending nation’s money unnecessarily. The voice increased when Republican presidential candidate Rick Perry supported the common US people. He came up with an alternative of 20% flat income tax rate. Over the years, US taxation policies have faced significant criticisms for its higher level of complexity. President Obama lead Government is facing lots of pressure from the country men to relax their present taxation rates. Rick Perry, Governor of Texas has come up with the example of foreign countries where flat tax rates are present. Current American income tax rate varies from 10-35 percentages. But the new taxation policy will fix that rate to 20%. This new idea of Rick Perry has created lots of debates in US. That is why the topic is a highly burning issue in the context of US taxation. It has been noticed that due to inconsistent tax rates citizens of US have showed their grievances (Anderson, 2011). To address those grievances the Texas Governor and Republican presidential candidate has come up with this new tax concept in 2011. During the course of this essay 20% flat tax policy will be critically evaluated. In this evaluation the concept of flat tax will be discussed in detailed fashion (Anderson, 2011). Discussion Flat tax is a concept of taxation where marginal rate is constant and predetermined. This concept of taxation has significant applicability in the context of individual income tax. This taxation concept talks about equal rate of taxation for every tax payers whatever may be their income. According to this concept of taxation, all the taxpayers are suppose to pay equal rate of tax without any opportunity of tax deduction or exemption. This taxation system allows high income people to get lots of high incentives as far as the taxpaying is concerned. Fluctuating tax rates force high income people to pay high taxes. But flat tax rate allows the high income people to pay less tax. Many people have identified this taxation fairer because there is no scope of inequality in tax paying rates. In the case of progressive taxation system, people are required to pay their taxes on the basis of their incomes but in case of flat tax system taxation is not at all dependent on the level of individual income. The concept of flat tax rate encourages simplicity and transparency in the taxation policy. The concept of flat tax eliminates the scopes of biasness in the field of taxation. Taxation is a complex matter. Progressive taxation creates far more complexities. On the other hand those complexities can be mitigated with the help of flat tax rate. Double taxation is a significantly troublesome matter and this is a menace. The basic of flat tax concept is to tax the earned income only. With the help of flat tax, economic growth can be achieved. Because flat tax does not over pressurize any people due to their higher productivity or high incomes (McCaffery, 2008). In 1776 Adam Smith came out with four principles of taxation. Those principles are known as the four canons of Smith. Within those four canons of taxation there are significant scopes of ethical and administrative perspectives. All these factors have made the four cannons significantly important and contemporary even after 300 years. Four canons of taxation are equity, certain, convenient and economically efficient (McCaffery, 2008). Canon of equity Canon of equity dictates that the people who have higher income they have to pay higher income taxes. Without the help of State protection individual cannot earn more money. According to this canon of taxation, individual should be taxed according to their ability to pay taxes. The fundamental principle of this canon is generalized taxation for all the people is not at suitable and creates unnecessary financial burden for the individual. With this canon the current progressive tax policy of US is significantly compatible. This canon of taxation does not support the new idea of Rick Perry. He is suggesting flat 20% tax rate for all the American people. He is trying to offer it as an alternative tax code for the people who are earning more money. This kind of flat tax rate cannot distribute burden of taxation properly. With the new idea of Rick Perry low income people of the society will be overburdened. The people who are suppose to pay 10-15 percentages of tax they will be over penalized due to this new concept. According to the concept of Smith, taxation should be used for the purpose of human growth. So economic and social justice is significantly important and it should not be overlooked at any point of time through taxation. 300 years ago Smith told that people should pay taxes to the Government according to their abilities. Here in this case Rick Perry is talking about such a tax system where there will be no difference between taxes of high and low income people. This is totally against to the fundamental of equity. This kind of taxation cannot provide social and economical justification to the low income people. Adam Smith has categorically stated that rich people cannot earn extra money without the protection of police and defense forces. It means rich people are using more Government protection than the low income people. So obviously they should pay the taxes more than other people do. The canon of equity tells that tax payment should be proportional with income. That means progressive tax rate is suitable for this canon. But in the present case Rick Perry is suggesting flat tax rate which cannot be proportionate with the all income people in the country. All the above arguments and discussions are clearly indicating that cannon of equity does not supporting 20% flat tax concept of Rick Perry. Between them there are significant fundamental differences (Kennedy, 2012). Cannon of certainty Adam Smith has categorically stated that, tax payers should know that how much taxes they have to pay. It means the taxpayer should be certain about their tax payments. It is being observed that in the current progressive tax system in America, most of the times taxpayers are not at all certain about their tax payments and they have to depend upon the discretions of the tax authorities. He also added that tax amount should not be arbitrary at all. It should be specific. The concept of Rick Perry is significantly certain in nature. The new concept of Perry states that, every American should pay 20% of his income as the income tax. This new rate is fixed and there will be no scope of reduction or exemption. That means people will able to calculate their taxing amount easily. With the current taxing code people of America is facing significant difficulties for calculating their tax amounts (Chand, 2008). In the current tax system taxation is highly uncertain in nature. Tax amount of the people fluctuate heavily. But the new concept of Rick Perry can provide significant certainty to the tax payers. They will be better informed about their tax amount. According to Adam Smith, Government or tax collecting authorities across the world should be certain about their amounts of tax collection. By this new concept of Rick Perry US Federal Government will be certain about their potential tax collection. Smith has categorically stated that tax payers should know how much tax they have to pay and they should be informed about the amount of tax in advance only. With the help of 20% flat tax policy, taxpayers will be able to know their tax amount well in advance before their tax payments. It will create sense of certainty for tax payers and Government as well. According to the certainty canon of Smith, tax payers should not suffer unnecessarily. They should have a clear and simple picture about their tax payments. The new policy of Rick Perry will provide that simplicity and clarity to the taxpayers. With this system they will not face any kind of unnecessary suffering from the side of Government authorities. Currently with the present progressive style of tax code, there are significant scopes of uncertainties where people have to pay lots of arbitrary taxes. It is not at all suitable with the canon of certainty. But Rick Perry with his new concept of 20% flat tax has ignored any kind of arbitrary tax payments. Here in this aspect also the concept of Rick Perry is satisfying the canon of certainty (Anderson, 2011). Canon of Convenience Convenience is the third cannon of Adam Smith. According to this canon, taxes should be collected according to the conveniences of the tax payers. The canon has further stated that, if taxpaying timing and way of taxpaying are suitable then people will be much more encouraged for paying their taxes. According to this canon, there is no sense to fix a time and way when taxpaying is not suitable. It means a good tax system should consider taxpayer’s conveniences and taxpayers should be offered suitable ways to pay their taxes. Texas Governor has clearly stated that the new concept of 20% flat rate will be paid through postcards. It means the republican presidential candidate has given significant focuses towards the convenient way of paying taxes (Forbes, 2005). It means as far as the convenient way of taxpaying is concerned the new concept of 20% flat tax policy is significantly satisfying the convenience canon of Adam Smith. It will help the American people to be globally more competitive nature. Currently the progressive tax code includes dozens of carve-outs. All these carve-outs have made taxpaying a highly inconvenient and incomprehensible matter for the people. But Rick Perry’s new concept of flat tax rate can eliminate all those inconveniences by eliminating all the carve-outs related with the matter. If the carve-outs are eliminated then the new tax system can be significantly suitable and easy to comprehend by the people. With the current taxation system there are significant complexities (Perry, 2011). All those complexities are generally being exploited by the various big organizations. They use their legal teams and tax experts to evade taxes. But the concept of flat 20% tax rate will eliminate all the complexities. Due to the convenience and simplicity of this new tax concept, big organizations will not be able to play their tricks for avoiding taxation. They will be able to pay their taxes without any difficulty and it will encourage them to pay more taxes. The new tax concept will bring an idea of Cut, Balance and Grow. This idea will be significantly convenient for the organizations of various sizes. The new concept of taxation will eliminate social security benefit tax. This benefit will be highly helpful for almost 17 million people related with it. It means that flat 20% tax rate of Rick Perry will create significant amount of conveniences for the social security tax payers. It is highly compatible with the canon of Adam Smith. The new tax policy will focus towards the in-country income only. Only the in-country income will be considered for the purpose of taxation. The concept of in-country flat taxation is also present in the countries like Hong Kong and France. All the above discussions and arguments are clearly indicating that 20% flat tax policy of Rick Perry is utterly aligned with the convenience canon of Adam Smith (Anderson, 2011). Canon of economically efficient According to the Adam Smith, tax collection should be economically efficient. According to this canon, economy should be there in the case of tax collection. In simple terms amount of collected tax should be higher than the collecting or administrative cost of tax collection. He also added that if collected taxes are less than the cost of tax administration then that tax doesn’t have any usage. According to this canon, widely spread and difficult to administer taxes should not be imposed. In the present case of progressive tax system in US, due to its vast nature taxes are wide spread and very difficult to manage. But 20% flat tax policy suggested by Rick Perry can reduce all those difficulties and administrative costs drastically. The new 20% flat tax policy will permit Americans to submit their taxes through post cards. It means the process will save almost $483 billion compliance costs for the country (Perry, 2011). It indicates administrative costs related with tax collection will be reduced. It is satisfactorily falling in line with the economically efficient canon of Smith. The new tax code not only saves lots of Federal costs but also it will create significant jobs for the people of the country. The new concept of taxation will be economically efficient because it will help the country to fix its federal spending highest up to the 18 % of the country’ GDP. That means this new concept of taxation is economically viable. According to the Smith, Government should reduce tax administrative costs as much as possible. Then only collection of taxes can be beneficiary for the nation, otherwise it does not have any purposes. But the Perry’s new policy has given significant focuses towards the administrative cost control related with the tax collection. All above factors and arguments are clearly articulating that 20% flat tax policy of Rick Perry is significantly suitable with the fourth canon of Adam Smith (Perry, 2011). Conclusion During the course of this essay one thing has been observed that, people of US are sick with their current progressive tax system. They are raising their voices for the changes. In this context governor of Texas, Rick Perry has come up with an alternative tax system known as 20% flat tax policy. The policy has been judged on the basis of Adam Smith’s Canons of Taxation. The new tax policy of Rick Perry is directly satisfying three out of four canons of Adam Smith. That means this flat tax approach has enough viability in the current context (Forbes, 2005). Many experts have identified it as the social and economic injustice towards the low income people. But all the other canons have highlighted various positive factors of this flat tax approach. All those positive factors are reinforcing the importance of flat tax approach only. In 2001 Russia came up with flat tax reforms. It has been significantly successful for the Russian economy. The country has fixed 13% flat tax rate. It helped the Russian economy to grow by 5% and revenue from the individual income tax also increased by 25%. That means countries like France, Hong Kong and Russia are using this flat tax policy successfully (Forbes, 2005). All the significant importance and other factors of flat tax approach are making it a favorable option which can be implemented for the betterment of the nation as a whole. This approach is definitely worthy enough for supporting and implementing. According to my opinion the flat tax approach should be considered with high level of focus and it is a suitable approach to alternate current tax systems. References Anderson, J. E., 2011. Public finance. London: Cengage Learning. Chand, S.N., 2008. Public finance, volume 1. New Delhi: Atlantic Pu.blishers & Dist. Forbes, S., 2005. Flat tax revolution: using a postcard to abolish the irs. New York: Regnery Publishing. Kennedy, M. J., 2012. Public finance. New Delhi: PHI Learning Pvt. Ltd. McCaffery, E, J., 2008. Fair not flat: how to make the tax system better and simpler. Chicago: University of Chicago Press. Perry, R., 2011. My tax and spending reform plan. [online] Available at: . [Accessed 11 November 2014]. Read More