Purpose for Providing a Tax System With a Neutral Treatment of Life-Cycle Savings - Essay Example

Taxation A of the current system Taxation on household savings acts as a central responsibility in the tax system. Since household savings are one of the main sources of expanding an economy, various factors emerge in place to find out on the rate of saving. Appreciating the advantages of saving as a determinant of economic and personal growth is increasingly expanding worldwide. The expansions are in place in countries like United Kingdom where the percentage of saving has reduced (Mirrlees 290). Thus, one of the most important decisions made by economist in the current taxation system bases on the selection of how much the income of a community is able to consume and save. This can have impacts both on the decisions made by households and the investment and growth rate within a given economy (Mirrlees 284). Different individuals make different decision on their savings. This is of great concern to in the study of literature. The inclusion of decisive and unclear matters as the concentration of reasonableness and good sense of various households has also been of great concern. In addition, taxation on these savings affects the degree of savings. Many individuals save because they want to consume in future (Poterba 334). Therefore saving becomes another way of creation of income for future expenditure. This essay tries to anticipate a few recommendations and other important related concepts. Proposed Recommendations Some recommendations proposed in improving tax system by Mirrlees are analyzed below. These recommendations are to enhance the smoothness of taxation on household savings. Firstly is the progress towards neutrality. In addition, it explains that there should be no tax charged on the normal capital of various households (Mirrlees 301). This means that taxation carried out based on household savings should not enhance on other areas of household monetary such as consumption but only on their savings. Thus, taxation on household savings should be neutral to promote the rate of savings by households. This recommendation achievement relies on savings taxed within a state of residence with no difference in foreign and domestic savings (King 216). The second proposed recommendation is that taxation on household savings should be simple, certain and transparent. The simpler the base of savings taxation, the lower the management cost it has. These expenses are difficult to calculate and therefore it is better when they are low. In view of certainty, it helps individuals collecting the tax on households to be precise and therefore successful in the process. This recommendation is advantageous to household savings tax collectors since there are reductions in incurred costs by them during the process of taxation (Madhur 316). (Mirrlees 308) adds that a tax system should go through proper formulation in order to meet all spending needs. For instance, there seems to be no need of incurring expenses on things that are should converge to revenues from particular taxes. Furthermore, not all taxes need to attend to all goals. Not every taxation process should aim at tackling progressivity so long as the consequent tax system is progressive (Mirrlees 287). Therefore, for a tax system to be better and simpler it should treat various economic actions in more or less the same manner (Marriott 111). Finally yet importantly on proposed recommendation is the principle of obtaining progressivity. This achievement is via imposing direct tax on household savings or through systems of benefit on these savings (Mirrlees 298). The recommendation tends to appreciate constraints enacted by the feedbacks to various incentives. Putting in place a tax system with effective progressivity enhances its efficiency in household savings taxation. Therefore, one should choose a proper tax system in order to achieve successful progressivity. Thus household savings taxation’s progressivity is very fundamental to economic and individual growth (Feldstein 126). Purpose for providing a tax system with a neutral treatment of life-cycle savings Different purposes emerge as to why taxation is important on household savings. This is in conjunction to the neutrality of the tax system. Firstly, based on the view of savings taxation one is able to understand the reason as to why his savings goes through taxation. The resultant is a better tax system within a state. On the concept of neutrality, the tax system can be efficient in minimizing discrimination between various activities of tax purposes. Thus, there may emerge better case for approaching pension savings of households in a more generous way. In relation to above, individuals may decide not to make decisions more often in a rational manner. Furthermore, neutrality in tax system helps individuals understand on how much to pay as savings taxation. They are then able to enhance on their savings after tax calculation (Feldstein 134). The concern of flexibility of average savings rate comes out as an important element on impacts of taxation on income and savings. Moreover, this element is also pivotal to questions that vary from immediate discount to effectiveness of monetary procedure. Both valid and hypothetical considerations have made most economic scholars to run to conclusion that the concern sensitivity of average household savings is prone to be quite petite. Therefore, in order to take full description of household savings for neutral taxation, one has to consider the average earnings of households within a state (Mirrlees 119). Neutrality also plays a central role enhancing cooperation by various household savings taxpayers. Taxation concept is well understood by individual through their experiences. Their cooperation greatly improves through these understandings. Therefore, people will tend to save a little when they are earning less unlike those earning more. Thus, these decisions made by households greatly impact on the government since it has to modify its policies in the field of savings taxation. The above is because not everyone is equal in terms of earning and saving in a state. (Hausmann 146). In addition, provision of neutrality in taxation interferes with individuals’ decisions on life cycle savings over investments of the same as capital (Mirrlees 314). This receives influence by the holdup of outflow points on a person’s earnings and savings as well. The result may be from the existence of constrains of credit thus making it difficult to calculate all costs of household investment and savings. Calculation of taxation basing on returns to saving implies that there are utilization taxes of whatever sector by households. Moreover, taxation on savings becomes the most appropriate way of redistribution of resources. Thus from this redistribution both the rich and the poor households are able to gain (Auerbach 155). Taxation of savings is also involves taxing individuals who wish to spend their resources tomorrow. This may seem unfair because they are not yet using these resources. Despite that, if not taxed it may also seem as a method of evading taxation. Therefore, employment of a comprehensive taxation helps to curb the problem resources becoming of surplus tomorrow. A tax system that is comprehensive in nature explains the involvement of households’ savings to tax system. In addition, the consequences from the delays of paying taxes may affect speed of capital gains. Enhancement of incentives in terms of creation also increases. Taxing household savings may also improve when individuals’ targeted are of high ability with minimal destruction to labor supply (Mirrlees 300). In other words where there are only middle and upper class people, taxation their savings if very efficient and fruitful to the government as well. Thus, to the concept of neutrality also is becomes easy to calculate their taxation (Creedy 112). Opinions on the strengths and weaknesses of the proposals The following proposals have many merits and demerits. Based on merits, the proposals provide different ways of improving tax system. This helps the government to raise revenues from different sectors of economy effectively. Moreover, the proposals may help the government to alert its people on why, when and how they will face taxation based on their income and savings. The above helps taxpayers decide in a familiar way on how to help their government achieve the stipulated objectives. Furthermore, neutrality of taxation becomes very vital to economic growth to reach its peak. The concept also helps in correct calculation and uniform rate of taxation of different sectors within an economy (Mirrlees 284). Those proposed proposals also enhances on simplicity of household taxation. The simpler a tax system is the lower the costs incurred. Therefore, the proposals provide the advantage of reducing cost within tax system. This is very important in achieving high yields and profits in household savings due to reduction in expenses. A tax reform involves achieving a strong base and putting up rates that encompass the amount that individuals as well as the government has. Despite the strengths, the proposal also has weakness. For instance, distortion of individual’s decisions becomes one of the main weaknesses. Individuals sometimes are forced to make decisions they are not willing to make. Some of which may include deciding not to save due to taxes charged on savings among others. Thus, their current leisure to future expenses may not be put into consideration. In addition, when household savings are highly taxed, their investments are also affected. They may not be able to invest in future, which may affect their life saving cycle. Thus, household investments once affected impact negatively on the economy at large. Those proposals therefore may have negative impacts on household savings and therefore their lives at large (Poterba 278). Another main weakness is that taxation on household savings is the most difficult and complicated process in tax system. Evading this type of taxation is easier as compare to that on consumption. One may decide not to save in government institutions or any other institution where this type of taxation exist but still save. This is because some individuals may view savings taxation as violation of their rights and thus not decide to save (Guiso 99). Descriptions and explanations of the type of potential winners and losers of such a move In every process, there are always achievers and losers. Taxation on household savings also has winners and losers. Some of the winners may include the government itself. It is able to obtain taxes from savings, which the economy does not use (Mirrlees 309). This is more or less free money to the government. In addition, some individuals who are likely to gain from this move are the rich and business people. For instance, the tax collected applies to enhancement of infrastructure, which in turn may help in expansion of business. Not to forgetting some people who do not participate in household savings, taxation may also benefit from improved public facilities offered by the government (King 367). In spite having the winners, there may also arise those who suffer from this move. Poor individuals may not like the move since it influences the little that they have to save. In addition, upcoming firms if taxed the same as mature firms on the concept of neutrality, suffer heavy loss capital. When taxation on saving is higher, the result is reduction in resources for investments. This may deter their progress or even cause their collapse (Auerbach 180). From above evaluations, it is essential to understand the issues of taxes on household savings. This entails those who bear the expenses brought about by this type of tax system. Therefore, the urge for improvement is important in tax system. Without a doubt, strategies should come in for comprehensible directions of savings taxation. Moreover, for these directions to receive proper understandings, they must go through proper considerations. Personal policies also need reviews. This will increase the simplicity, clarity among other important element of taxation as evaluated above (Mirrlees 317). In conclusion, therefore, for maintenance of good monetary value within an economy, savings taxation becomes very important. Tax system requires different innovative methods to enhance its process. Much of considerations must face appreciation relating to the field of taxation. It is important to start by viewing various obvious facts on individuals’ actual behaviors of saving. Therefore, devolution duties and experimentation of various inventions should be included. References Mirrlees, James A, and Stuart Adam. Tax by Design: The Mirrlees Review. Oxford: Oxford University Press, 2011. Print. Taxation and Household Saving. Paris: OECD, 1994. Print. Poterba, James M. Public Policies and Household Saving. Chicago: University of Chicago Press, 1994. Internet resource. King, Mervyn A, and Don Fullerton. The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden and West Germany. Chicago: University of Chicago Press, 1984. Internet resource. Madhur, Srinivasa. Taxation and Household Savings in India: An Empirical Study. New Delhi: Indian Council for Research on International Economic Relations, 1984. Print. Marriott, Lisa. The Politics of Retirement Savings Taxation: A Trans-Tasman Comparison. Sydney, N.S.W: CCH Australia, 2010. Print. Feldstein, Martin S. Capital Taxation. Cambridge, MA: Harvard Institute of Economic Research, Harvard University, 1982. Print. Guiso, Luigi. Household Portfolios. Cambridge, Mass. [u.a.: MIT Press, 2002. Print. Encouraging Savings Through Tax-Preferred Accounts. Paris: Organisation for Economic Co-operation and Development, 2007. Internet resource. Hausmann, Ricardo. Promoting Savings in Latin America. Paris: Development Centre of the Organisation for Economic Co-operation and Development, 1997. Print. Publishing, OECD. Oecd Economic Surveys. Paris: Organisation for Economic Co-operation and Development, 2011. Internet resource. Auerbach, Alan J, and Martin S. Feldstein. Handbook of Public Economics. New York: Elsevier, 1999. Internet resource. Creedy, John. Dynamics of Inequality and Poverty. Amsterdam [u.a.: Jai Press, 2006. Print. Read More