How Current Taxation System Reflects the Concept of Equity - Assignment Example

How current taxation system reflects the concept of equity (fairness) The system of taxation of an economy requires a financial charge upon a taxpayer of that country by the state or the governing body of the state with functional responsibilities so that any malfunctioning by the taxpayer to pay is liable to be punished by the state. The taxpayer may be an individual resident or may be a legal business entity of the country. However in case of any existing tax system of an economy it has always been a great concern for the economist, policy maker, business leaders, financial institutions, common people or any other rational social agents whether the tax system follows the equity principal. The principal of equity states that taxation should follow the principal of ability to pay, i.e., tax must be levied on the taxpayers, in-line with payment ability. The principal of equity has two dimensions- the horizontal equity and the vertical equity. Theory of horizontal equity states that people of identical income band should pay tax at same rate. On the other hand, theory of vertical equity states that people belonging to different income set need to be taxed at diverse rate, i.e., people with greater paying ability should give more tax to the government than their counterparts of lesser paying ability people. To evaluate the current taxation system in UK on the ground of equity, we have to rationalize our thought to enlighten the effect of the present system on overall development and welfare of UK economy. To minutely analyze the overall effect of the present tax system we should first look at some of the relevant statistical information that were reported in the Pre-Budget Report, December 2009 and was presented to Parliament by the Chancellor of the Exchequer. A general picture of the Government’s revenue and expenditure plan were reported in this report keeping in mind the overall approach of the government to economic, social and environmental objectives. Let us now see some of the statistical highlights presented in the report on individual ground, for business and corporate environment and for banking facilities. (Pre-Budget Report December 2009; Hagemann, Jones & Montador, n.d.) Let us first check the statistical highlights for individual residents of UK which are as follows: • Bingo duty cut from 22% to 20% (Pre-Budget Report December 2009, 2009, p.94) • VAT rate to be restored to 17.5% from 1 January 2010 (Pre-Budget Report December 2009, 2009, p. 147) • Electric cars to be exempt from company car tax for the next 5 years (Pre-Budget Report December 2009, p. 132) • Households are to be taxed at 50p per month on landline telephones to enable the expansion of Broadband. (Pre-Budget report: Line-by-line summary, 2009) • 10,000 students from poor economic conditions to receive financial support and help to access training in business. (Pre-Budget Report December 2009, 2009, p. 69) • Pension tax liberation to be cut for those with an income of £150,000 and above (Pre-Budget Report December 2009, 2009, p. 1) • IHT sill frozen at £325,000 (married couples £650,000) (Pre-Budget Report December 2009, 2009, p.7; Goundar, 2009) • NIC rise from April 2011 of 0.5% for employers, employees and the self-employed, excluding those earning less than £20,000 p.a. (Pre-Budget Report December 2009, 2009, p. 10) We can find some of the statistical highlights in the context of Business and Corporate that were presented in the Pre-Budget Report. These are given as follows. • Time to pay tax arrangements extended for ‘as long as necessary’ (Pre-Budget Report December 2009, 2009, p.93; Singh, 2009) • Business rate exemption for empty premises extended to 2010/2011, for properties with rateable value below £18,000. (Pre-Budget Report December 2009, 2009, p.60) • £500m capital growth fund to aid business’ access to credit (Pre-Budget Report December 2009, 2009, p.62) • 100,000 offshore reports to be looked at to protect £5bn tax revenue. (Pre-Budget Report December 2009, 2009, p.73) • £5bn saving in government spending by outsourcing prisons together with the reform of legal aid. (Pre-Budget Report December 2009, 2009, p.8) Steps towards the plans to reform the corporate tax can be summarised as follows: • Small business rate increase from 21% is deferred. (Pre-Budget Report December 2009, 2009, p.60) • Pharma and bio tech patents profits to be subject to CT rate of 10% (Pre-Budget Report – 9 December 2009, p.7) • Electric vans to be given 100% FYA (Pre-Budget Report December 2009, 2009, p. 128) Some reformatory steps towards the functioning of the banks in UK can be highlighted as follows: • One off levy on banking bonuses of £25,000+, to raise £550bn and encourage banks to rebuild their reserves and increase lending. (Pre-Budget Report December 2009, 2009, p.1 & p.10) The main reported headline was for the tax on bonuses paid by the banks, to try to change the culture of rewarding employees via bonuses rather than annual salary and to appease public opinion. If we consider the highlights on individual ground we can see that a balance has been maintained there. In one hand where some tax exemptions were given to the individuals, especially for the young aged students and old aged pension holders. Some optimistic individual expected a rise in the threshold value of the inheritance tax level. It did not happen, rather the level has been frozen at the previous level. National insurance contribution level has also been increased for all types of employees. All these measurements imply that the government is in a mood of financial recovery and is positive towards strengthening its control over the economy. This thought of the government is also reflected by the restoration of VAT again to 17.5% from 1st January, 2010 from the rate of 15%. However, general people may not accept to give taxes for usage of landline telephone facilities. But this step by the Chancellor of the Exchequer will be helpful to add some more money to the government revenue fund. (Adam & Browne, 2009; Waidyasekera, 2007; Daily mail November 30, 2009) Analyzing the statistical information regarding towards the business environment, it is clear to view that the government has taken very flexible movements to promote the business activity within the economy. This kind of time flexible and rate flexible movement of the government along with a promotional strategy for access of more capital in the market will obviously strengthen the business atmosphere within the economy. So the business persons should not show any lethargic gesture to welcome such steps. Highlighted statistics in connection with the corporate tax also favour this argument. The Government not only promotes more opportunity to the business giants of the country but has also taken some promotional activity towards the SMEs by deferring the hike in the business rate. Capital allowances in the form of First Year allowances (FYA) to the electric vans also give a sign of enthusiasm from the government to intensify the business activity in the country. (Capital Allowances, 2008). A better functioning of banking facilities within a country reveals the strength of flexibility and monetary movements within the economy. It is expected that government would like to take control over the rolling of money in such a way that will be helpful for the economy not only at present time but also in near future, especially after the effect of the financial tsunami that the world has faced in recent time. Regarding the highlighted point reported for banking moment, one can argue that it may not be fare to penalize the banking professionals in such a way. But if one views the movements taken by the government in a broader way then he/she will agree that this step will definitely increase the amount of money within the country. Steps towards rebuilding the reserve and increase in lending will further strengthen the circulation of money within the economy which in turn will facilitate the growth and development activities in the state. Conclusion Analyzing the current taxation system on the floor of equity, one may conclude that UK government has taken lessons from the recent financial crisis. Keeping that in view, the government has taken some positive and bold steps to strengthen the economy though how much equitable those steps are not out of criticism. However, if we look these steps with a broader mind we can definitely see that a proper balance has always been maintained. So if socialists argue that on question of equity this system is not out of criticism, then the economist may argue that for future development we may keep aside too much concern over equity at present. References 1. Adam S & J Browne, (2009). “ A Survey of UK Tax System”, The Institute for Fiscal studies, available at: http://www.ifs.org.uk/bns/bn09.pdf (accessed on March 15, 2010) 2. “Capital Allowances” (2008), Available at: http://www.cottonsaccountants.co.uk/business-factsheets/business-general/Capital%20Allowances.pdf (accessed on March 15, 2010) 3. Daily mail (November 30, 2009) “ Inheritance tax threshold may not rise in 2010”, thisismoney, Available at: http://www.thisismoney.co.uk/tax/inheritance/article.html?in_article_id=495099&in_page_id=78 (accessed on March 15, 2010) 4. Goundar, S. (2009). PBR 09: Chancellor confirms Inheritance Tax threshold freeze, Accountancy Age, available at: http://www.accountancyage.com/accountancyage/news/2254725/pbr-09-inheritance-tax (accessed on March 15, 2010) 5. Hagemann, P. R, B. R. Jones & R. B. Montador . (n.d.), “Tax Reforms in OECD Countries: Motives. Constraints and Practice”. Available at: http://www.oecd.org/dataoecd/48/34/35622908.pdf (accessed on March 15, 2010) 6. Pre-Budget Report – 9 December 2009, (2009). Vantis, available at: http://www.vantisplc.com/NR/rdonlyres/32E27635-BB15-47EB-8861-73A7824AC06F/0/PBR141209.pdf (accessed on March 15, 2010) 7. Pre-Budget report: Line-by-line summary, (2009). Financial Times, available at: http://blogs.ft.com/westminster/2009/12/pre-budget-report-line-by-line-summary/ (accessed on March 15, 2010) 8. Pre-Budget Report December 2009 , (2009).“Securing the recovery: growth and opportunity”, Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty, available at: http://www.hm-treasury.gov.uk/d/pbr09_completereport.pdf (accessed on March 15, 2010) 9. Singh, R. (2009) PBR 09: Time to pay extended, Available at: http://www.accountancyage.com/accountancyage/news/2254704/pbr-09-pay-extended (accessed on March 15, 2010) 10. Waidyasekera , D.D.M. (2007) , “Role of the taxation in development strategy”, available at: http://www.ips.lk/news/mediaarchive/17072007_dn/17072007_dn.pdf (accessed on March 15, 2010) Read More