Benefits of Making a Choice of Taxing over Citizens Lifetime - Essay Example

MIRRLEES REVIEW Introduction Sir James Mirrlees was the chairperson of the fiscal studies institute, which sat in2006 and made various proposals for the amendments for improvement of the UK tax system. The current tax system makes future consumption prices be very high than the cheaper consumption done now. This is so because of the instant tax as earnings are received and when one returns to savings. Neutrality principle that proposes the tax levy on assets need not influence the type and amount of savings an individual decides. This system gives people chance to make a free willed choice of when to consume earnings. The very citizens make a choice on their saved assets and how they will be taxed. The proposed system broadens the tax base, reduced tax rates, and notable reduced disincentives for jobs people routinely undertake. By providing a tax on the life-cycle savings the tax base which is the main characteristic for taxation is acknowledged and will help the policy makers come up with an all inclusive tax policy. The main strength of the proposal is that it will successfully capture a very large tax base. This means a stable economy for a country when the tax has been collected. The current system This tax system taxes people’s savings on a ‘normal return to savings’. The system tries to compensate on the delay in consumption caused by the owner. The tax system is heavy on citizens who choose to save now and decide to consume later in their life. In simple terms, the policy taxes heavily on consumption tomorrow compared to taxes on what is now consumed. Taxes tomorrow mean that the system cannot have better-off returns from the system. The tax system has no accurate means to capture those with high abilities in income levels. Inefficiency and a degree of unfairness are present in this taxation system. The mismatch is evident because of the lack of a known and coherent relationship between those who make a choice to spend and drifting into knowing other underlying characteristics of their earnings like capacity (Stiglitz 2013). The current tax system makes future consumption prices be very high than the cheaper consumption done now. This is so because of the instant tax as earnings are received and when one returns to savings. In terms of value, according to the current system, income is of higher value now when consumed now than when utilised for consumption later. The system is however a victim to inflation. When a countries inflation rates goes high the interest rates become high too to compensate for the falling real value of the principal. Putting compound interest into perspective here means when tax levied reduces on rate of return and is seen to be punitive to its citizens (Ryan. 2013). The idea, compound interest, reduces the total amount of the general wealth generated. Future consumption is greatly reduced when compound and inflation victimise the tax system. It reduces on the future consumption. Tax system that is fair and considerate here is near impossibility to design. This is true particularly when it comes to taxation of capital gains without giving regards to adjusting it. Proposed recommendations: The principle of neutrality There are two approaches to the principle of neutrality. A tax system through timing and level of savings is the first angle. This system gives people chance to make a free willed choice of when to consume earnings. The second approach focuses on giving citizens a choice on their saved assets and how they will be taxed. The proposed system broadens the tax base, reduced tax rates, and notable reduced disincentives for jobs people routinely undertake (J Mirrlees 2012). Neutrality principle that proposes the tax levy on assets need not influence the type and amount of savings an individual decides. An exception that exists though is in pensions and pension schemes in cases where those who choose to this are treated with generosity with the view of encouraging citizens that have poor saving habits in order to safeguard their retirement packages. The system formulates a comprehensive income tax where the individual capital gains are subject to tax at the same time in comparison to other incomes realised from savings. Taxation is on accrual basis that is when value increases and not subjected on realization only. An example is an asset bought and gains value over a long period. It would be honourable and rewarding to tax after that period has elapsed. The delay on taxing of an asset reduces rate of effective tax on the citizen. The unequal rates of taxing the asset are favourable for those assets that generate capital gains as their returns in cash. The reform in practise implies that distortions to the patterns as evident in saving over time and assets. In considering, the three stages involved in taxing that includes tax upon receiving earnings, as accruing occurs on returns, and upon withdrawal of funds or sale of an asset (J Mirrlees 2012). The forms used in taxation herein the reform are the ‘cash-flow expenditure tax’ that levies a client upon use of receipt cash for consumption. The ‘labour earnings tax’ clearly excludes taxing of income and ‘income tax that have rate-of-return with allowances’ does impose tax on labour earnings. The purpose By providing a tax on the life-cycle savings the tax base which is the main characteristic for taxation is acknowledged and will help the policy makers come up with an all inclusive tax policy. This is in the view of their level of income and the time they receive earnings or return to savings. The savings treatment goes along way into recognising the interpersonal variations of income over the entire lifetime. This feature enables the system: tax system, to capture returns appropriately. This will enhance the design of tax system that equalises on tax burden imposed on the taxpayers (Pernilla 2013). The taxpayers might be of different patterns of incomes and of similar amount of lifetime income levels. This taxation on savings according to economists and tax policy makers is on the boundary of taxation of individual income and company taxes on its profits. The reform or the design of tax on savings determines greatly on the behaviour, which small firms and businesses adopt. Tax allocation across different assets and the total amount of savings available at any one time in the economy is easily known. A careful design will incline towards more capital investment and efficiency in the investment made. Probably the most critical purpose of imposing taxes on the basis of the neutrality tax system is because over time the government has realised that tax policy determine a great deal on the amount citizens save, their timing of the saving, and the risk extent taken when it comes to asset (Olivie 2013)s. Generally, the tax system allows people to choose how to pay their taxes and when to pay then. The tax policy reform seeks to unburden the forceful optimal saving, which has distortion on the saving character of persons. The idea, too, goes further to provide a safe hide place for those who fail to prepare for consumption in future. Consumption smoothing is a hard idea to achieve for poorer households and those that have limited access to credit. To effectively, or fairly, capture them into the tax system a neutrality principle comes into lime light. People’s patience, long-term decision, and self-control, which vary among citizens, will not be allowed to play decision on taxing. Opinion: Strengths The system, no doubt, has both sides of the merits or strengths and weaknesses. The main strength of the proposal is that it will successfully capture a very large tax base. This means a stable economy for a country when the tax has been collected. By allowing citizens to make a choice of taxing over their lifetime they are not only encourage doing it but also offered a reduced instantaneous burden. From the government point of view who are responsible for the actual implementation of the reform, their will be improved returns from the tax levied hence an increase in government capital at their disposal. When an aged citizen taps into his earlier paid tax, it means less dependence on the active in the society. This will encourage the young t work hard as they save more for their future use amidst the tax policy. Asset taxing is a slippery idea that careful design needs to be put forward in order to effectively capture tax from its returns. The savings-neutrality proposals will definitely capture the returns from assets hence a good system for any country that seeks stability. This will encourage the poor and the rich alike to invest in assets. They know that they will gain value from it. Opinion: Weakness Those persons who are more patient and have higher incomes suffer a great ta levy from their savings. When markets fail, there are difficulties in investing. This may sway people’s decision on investing at that time and the tax return from savings distorts decisions. With uncertainties about outlook, citizens may opt to save with hedge (J Mirrlees 2012). Consumption and leisure go hand in hand. This fact might influence a lot in terms of the amount of tax levied on goods and services. Potential winners The system seems to target the majority of the citizens a the country who for some reason might be indecisive in saving for their future or investing in particular assets because of fear of tax levy. By neutrality upon saving, the majority low class will benefit more. They will have money for investment and still have a trust of their money used during their retirement age. Potential losers Those who extreme doubting Thomases have very low patience levels will for sure loose out from the plan because they will fail to invest but continue paying taxes. During consumption, those who love too much leisure are victims of the tax system (Michael 2013). Those persons who are more patient and have higher incomes suffer a great ta levy from their savings. When markets fail, there are difficulties in investing. Conclusion When citizens are allowed to make a choice of taxing over their lifetime they are not only encouraged to doing it but also offered a reduced instantaneous burden. Upon imposing neutrality on saving, the majority low class will benefit more. They will have money for investment and still have a trust of their money used during their retirement age. Consumption and leisure go hand in hand. This fact might influence a lot in terms of the amount of tax levied on goods and services. Asset taxing is a crucial factor that careful design needs to be put forward in order to effectively capture tax from its returns. The idea, too, goes further to provide a safety net for those who fail to prepare for consumption in future. Consumption smoothing is a complex idea to achieve for poorer households and those that have limited access to credit. List of references J MIRRLEES, JP Neary, J. tirole (2012). evaluating economiics research in europe. european reforms, 1 (2), 2-23. KENNETH, ARMSTRONG (2013). The new governance of EU fiscal discipline. in European Law Review, 38 (5), 601-617. MICHAEL, LANG (2013). Introduction to European tax law. direct taxation, 2 (4), 12. OLIVIE, BARGAIN (2013). Fiscal union in Europe?: Redistributive and stabilizing effects of a european tax-benefit system and fiscal equalization mechanism. Economic Policy, 28 (75), 375-422. PERNILLA, RENHAHL (2013). EU VAT and double taxation. Intertax, 4 (4), 450-461. RYAN., MURPHY (2013). Why does tax have to be so taxing? European Law Review, 38 (5), 695-710. STIGLITZ, JE (2013). theory of capital. Journal of Political Economic, 2 (3), 12. Read More