The UK Present Taxation Systems - Case Study Example

Introduction According to the business directory, taxation is a means by which governments finance their expenditure by the imposition of charges on citizens and corporate entities. It is also a means by which governments can either encourage or discourage certain economic decisions. Taxation in the UK takes the same trends and serves the same purpose as any other country. However, there are numerous differences and suggestions which can be traced to the UK taxation systems (Buti 50). This paper analyses the present taxation systems and Mirrlees recommendations on the same. UK Present Taxation Systems The UK imposes three main direct taxes on individuals: income tax, capital gains tax and inheritance tax. Taxation on individuals in the UK depends on whether a person is resident, ordinary resident or domiciled in the UK. An individual is termed as resident if they have physically lived in the country for 183 days or more in a specific tax year. However if the individual lives in the UK for less than 183 days they may be treated as residents if only they visit the country regularly at an average of 91 days for a period not exceeding 4 years (Guiso 473). Taxable Income and Rates An individual who is resident, ordinarily resident and domiciled in the UK is subject to the UK taxation on incomes and capital gains on a worldwide scale regardless of whether the income was generated in the UK or not, this is subject to the provisions of an applicable tax treaty. Certain UK residents are not subject to worldwide taxation. Resident individuals who are domiciled in other countries can be taxed on their foreign incomes and capital gains on a remittance basis. If an individual prefers a remittance technique in taxation they will be taxed on a longer scale basis. For residents who have been in the UK for the past seven years out of nine years are subject to an annual charge of GBP 30,000 with an increment of up to GBP 50,000 where the individuals have been residents for 12 years of the 14 years (Poterba 57). Taxable Incomes This includes income from employment which encompasses fringe benefits unless an individual earns less than GBP 8,500 per year. Income from trading, savings and investment income from the UK foreign property businesses and other associated incomes also form a huge section of the taxable incomes. Earned and unearned income is combined to attain a taxable income from the huge base of activities in the economy. Income from employment is usually assessed in the year of their incurrence. Dividends and other unearned incomes are assessed on the year of their reception (Poterba 58). Share incentive, pension and certain saving schemes may confer tax advantages. GBP 3,600 is a range of taxation deductibility of private pensions and schemes. Tax relief is done via an annual pension’s savings period which ends in a given annual period in the taxation period: the limit ranges within GBP 50,000 and within the year 2014/2015 it is expected to range at a value of GBP 40,000. Employees may deduct the amount of expenses incurred wholly, exclusively and any other necessary performance of their duties (Clark 64). VAT Value added tax (VAT) is a proportional tax paid on all sales made. The standard rate of VAT has remained at 20% over time since 2011 which was previously at 17.5%. There are a number of goods which are exempt goods on the VAT. In these goods the final products are not levied with VAT but the inputs used in the production of this goods encounter or are subject to VAT. Zero rated goods on the other hand have no VAT levied upon them. Excise duty encompasses three major goods, alcoholic drinks, tobacco and fuels. Tax levied on these goods is undertaken at a flat rate basis. Tobacco products carry an additional valorem tax of 16.5% of the total retail price. A closer observation of the taxation system in the UK and especially the VAT sub components points out that there is a double taxation system since citizens pay both the VAT as an indirect tax and PAYE which is a direct tax (Clark 68). Saving and Taxation In UK People often tend to save on the basis of their incomes; when the incomes are high people tend to save more than when their incomes are low. Thus, savings relies on a number of factors; for instance the responsibilities one is subjected to and the stage in life. In the UK there is a system which tends to tax individuals gauging on their life cycle, it is a consideration which is made on the basis of an individual’s productive life and the late stages when retirement is achieved. Individuals will tend to save early in life than other stages basically because it is at this juncture that productiveness is at the optimal. The UK taxation system generally targets this stage in life for its revenue collection. UK current taxation system is streamlined on the basis of productivity; it does not endeavour to bring a balance between the different individuals in the country (Guiso 474). Mirrlees Review of Tax System And The Recommendations Criticism of Current System by Mirrlees Mirrlees (400) views the Britain’s tax system as engulfed with a number of challenges which if changes are made would impact positively to the people. Mirrlees argues that if reforms where made then the welfare of the entire society will be addressed hence higher rate of economy performance. Some of his proposals include: - the tax system should be designed wholly in line with the benefits systems. He urges that the system should be green and progressive in nature; tax should adequately fit in a manner that no interference exists in the economy (Great Britain 100). The current Tax system in the UK has a complexity of enjoining two separate taxes on earnings these are income tax and national insurance contributions. It basically plays like a double taxation scene. The most recent changes have brought into being a marginal rate structure which encompasses marginal income tax rates rise to 60% from 40% on incomes which range between GBP 10,000 and GBP 12,950. UK has a complex array of affairs which make many people uncomfortable to deal with, it imposes high taxes on some low earners in the economy also it does not account for how different people respond to incentives which are given unto them. The UK applies a zero rate of VAT to a range of goods than any other country. Reduced and zero rate VAT is a mechanism adopted by the government as a method of helping the people in the society. But clearly observing these techniques there are underlying numerous pitfalls which need to be covered. It is basically an expensive and inefficient means of operations in the country. A reduction on VAT on fuel consumption encourages carbon emission which in turn is harmful to the surroundings (Albi, Ibáñez E, and Jorge Martinez-Vazquez 3). Recommendations Thus, the findings by Merrilees (210) recommend that the tax system should seek neutrality. The country should adopt a new tax system which treats all people the same. This means that the systems should adopt a means of scheduling personal taxes and benefits rather than engaging in behaviors which distort the whole operation. According to findings of Merrilees (407), the rate structure of the income tax should be simplified in such a manner to reduce the complexity of the model. In addition the income tax and the National Insurance Contributions should be merged to come up with one coherent tax on earnings. A single integrated approach which is beneficial to the concerned parties should be introduced to replace the current multiplicity of benefits which is to be used in rationalizing the manner in which total support can vary with the income and other related characteristics. The recommendations concerning VAT traverses around an extension of VAT to nearly all spending in the country this will create a resultant decrease in complexity and costly distortions on consumption choices. The money got may be spent on cutting down the income taxes and increasing the benefits accrued to the comfort of the people in the society. It will also spur a broad and equitable distribution of resources and incentives. VAT application on financial services is never easy to apply like it can be done on goods, but a broad tax system will be able to ensure the application of the VAT (James 25). Housing is subject to stamp duty and land tax, these two frameworks are poorly designed on the tax transactions hence inefficient. The reason being that housing is not subject to VAT. Housing is also subject to council tax which is an outdated fashion of revenue collection dated 20 years ago with no review. The stamp duty should be completely eliminated so that payments could be made fully proportional to house value. The reformed council tax, which is termed as the Housing Services Tax would bring the same impact as VAT (Datta 108). Purpose of Provision of a Tax System with Neutral Treatment Of Life Cycle Savings Under the new provision in the tax system there can be two major rationales to explain the impact of savings. First of all bringing about a common ground on taxation of savings is very important. According to the current system many people may save very little as compared to the requirements of their lives. If people were to save enough during the early parts of their economical life it will help relief pressure on the government which will be able to expand pension programs to protect older who suffer a decline in living standards. Policy makers make a mistake by considering actual earnings and expenditure as the main source of taxation. However, this consideration discourages savings in the economy. People will find themselves intertwined to consider leisure more than other productive techniques in the country. Taxation of savings may be seen as the best measure to improve proportional distribution of savings but in real sense it hampers equality. Savings do not portray the real capacity of assets one holds rather it shows that someone prefers to carry forward their consumption needs to days ahead. Taxation on household savings is very inefficient as it kills the spirit of saving in people. If it were to show the real value of the assets or financial capability one has, then it could be the best but it doesn’t show this (Kaplow 404). Strengths and Weaknesses The review analyses major sections than it is in real policy analysis. First the review takes into account the life cycle considerations which if keenly taken into account can increase the child tax credit for parents of younger children while on the other hand reducing the credit and phase out severity for parents of older children. Secondly it considers the incentive effect at both the extensive and intensive margins, hence providing different figures that plot to participation tax rates and effective marginal rates (Daunton 60). Compound interest on taxation means that there is a reduction in the effect of returns expected from savings. Tax which is carried on savings is carried over a long period of time which becomes very expensive to the taxpayers. For young people who may want to invest for future years to come will experience high level costs at later stages, hence discouraged from savings. Also it is quite difficult to tax neutrally across the economy due to a number of difficulties which are faced. For example, tax is based on a realization on accrual basis this means that neutrality will not be an easy task (Howard et al. 300). Potential Winners and Losers Some of the prospective losers are oil and gas companies, private equity firms and companies that move jobs overseas. Other losers in the country include some of the manufacturing companies who have to adopt skills or inputs from the affected sectors. The big winners in the sector include; mothers who have taken their time to raise children, low earners in the society and the self employed individuals are expected to benefit immensely from this proposal (Hills 100). Conclusion In conclusion, it can be seen that the taxation proposal is a better approach to amalgamation of the various activities in the country, however it does not come without its own challenges which include the complexity and time frame of the proposal. Countries ought to strengthen their taxation policies to ensure efficient systems of operations. Revising the taxation system will not be an easy task since there are numerous issues which will need to be balanced before a new tax system is introduced in the country, as depicted above. Works Cited Albi, Ibáñez E, and Jorge Martinez-Vazquez. The Elgar Guide to Tax Systems. Cheltenham: Edward Elgar, 2011. Internet resource. Buti, Marco. Taxation, Welfare and the Crisis of Unemployment in Europe. Cheltenham [u.a.: Elgar, 2001. Print. Clark, W S. Taxation of Capital Gains of Individuals: Policy Considerations and Approaches. Paris: OECD, 2006. Print. Datta, Saugato. Economics: Making Sense of the Modern Economy. Hoboken N.J: John Wiley & Sons, 2011. Internet resource. Daunton. Just Taxes: The Politics of Taxation in Britain. S.l.: Cambridge Univ Press, 2007. Print. Guiso, Luigi. Household Portfolios. Cambridge, Mass. [u.a.: MIT Press, 2002. Print. Great Britain. Dimensions of Tax Design: The Mirrlees Review. Oxford: Oxford University Press, 2009. Print. Hills, John. Wealth in the UK: Distribution, Accumulation, and Policy. Oxford, United Kingdom: Oxford University Press, 2013. Print. James, Malcolm. The UK Tax System: An Introduction. London: Spiramus, 2009. Print. Mirrlees, James A. Welfare, Incentives, and Taxation. Oxford [u.a.: Oxford Univ. Press, 2006. Print. Mirrlees, James A, Howard R. Vane, Chris Mulhearn, William S. Vickrey, George A. Akerlof, Michael Spence, and Joseph E. Stiglitz. James A. Mirrlees, William S. Vickrey, George A. Akerlof, A. Michael Spence and Joseph E. Stiglitz. Cheltenham: Edward Elgar, 2010. Print. Kaplow, Louis. The Theory of Taxation and Public Economics. Princeton: Princeton University Press, 2011. Internet resource. Poterba, James M. Public Policies and Household Saving. Chicago: University of Chicago Press, 2004. Internet resource. Read More