Economic Taxation in the United Kingdom - Coursework Example

 Economic Taxation in the United Kingdom Question 1 There are various reasons why UK government taxes its citizens. The United Kingdom taxes its citizens to pay for the government expenditure. The UK government needs to hike their finances to pay for the public expenditure. The government can borrow some of the amount, but a higher percentage of the revenue comes from taxation especially when the nation needs to avoid inflation. Additionally, the government taxes their citizens in order to correct the market failure. The United Kingdom government can take into concern in the individual markets by either lowering or raising the taxes and thus changing the demand level (Kowalski, 2006). For instance, raises taxes to lower the demerit goods demand like the cigarette, pollution control, exempt taxes from goods such as books from the Value Added Tax so that their demand can be encouraged. For instance the United Kingdom government raised their taxes from 17.5 per cent to 20 per cent as it looked in boosting the revenue. The business groups found in the country warned that the retailers will be majorly affected by the increase. The rise in the taxes helped the United Kingdom government to lower the budget deficit that is considered to be very high. The per cent age rise of taxes will raise the revenue for the country by 13 Billion pounds annually. Therefore, increasing the tax rate is considered to progressive than raising the income tax. The Value Added Tax is added on the price of the commodities (Macht, 2001). Therefore, the VAT imposed on the good tends to pivot the supply curve on a rising trend as shown in the diagram below. The Value Added Tax value tend to rise when the price increase. The effect of imposing VAT on the equilibrium point, the price and the supplied quantity will be as shown in the graph below. Consequently, the United Kingdom government taxes its citizen so that their economy can be managed. The United Kingdom government uses the fiscal policy in influencing the economic variables such as balance of payment, inflation, and unemployment. Finally, the United Kingdom government taxes its citizens so that the income of their citizens can be redistributed (Brennan & Murphy, 2013). If the United Kingdom government feels that income distribution is not balanced, the government will impose taxes that will reduce the wealth and income of certain groups found in the society and employs the mechanism to increase the wealth and income of other groups. The increase is normally from the rich to poor. The United Kingdom government imposes taxes on their citizens because the taxes have indirect impact on their economy. For the purposes of resource allocation, the tax charged on the goods or services raises the cost of production. This helpful for allocating resources in the country. For growth and productivity purposes, the government will impose taxes to its citizens. When the dividend and interest rates are high, the citizens will save less money; this affects the amount of cash available for production in investing to business. Some of the economists believe that high taxes will minimize the incentive to operate (Bacon, 2007). Additionally, others think that the tax tends to promote the underground economy especially when the taxes are higher. The United Kingdom government taxes controls the economic behavior. The tax incentives will influence the behavior of the economy. The tax credits will encourage the society and economy behavior. The indirect impact of taxes to the economic will change the behavior of the economy especially the externality taxes that will be imposed on the damaging products, unhealthful, and activities (McCarthy, 2008). Question 2 Under the 1975 Labour government, the fundamental personal income tax rate was 35 per cent and top rate was 83 per cent, with the core rate of corporation tax standing at 52 per cent. In April 16th 2014, the equivalent rate will be recorded at 20 per cent and 45 per cent for the income tax and 21 per cent for the corporation tax. The section therefore, evaluates the economic impacts of a cut in the direct taxes for the firms and individuals in the United Kingdom. The paper considers the benefits and costs. The direct taxes of the United Kingdom government are progressive; the VAT is widely proportional because the goods are zero rates. The changes that happened in the 1980s that shifted the system to indirect taxation to direct taxation made the system to be more progressive, but the system was progressive at the beginning of 1980. The change in the system balanced things out. The labour market made changes that helped the households that were considered poor. The rate of income tax was brought in. Generally, the tax system is broadly proportions. The United Kingdom need to be progressive so that the richer members help those who are less fortunate. The problems are though considered to be incentive. Based on the equality factor, the indirect taxes are normally considered progressive. The shift from the direct to indirect made the income distribution in the United Kingdome less equal. Based on the incentive argument, the direct taxes are not considered good especially when they are too high. This is considered to be disincentive to work, which leads to reduction in the workforce quantity and quality. When the indirect taxes are high the price of services and goods will be raised and thus reduce the real income of workers. The extent at which this occurs is dependent on the demand elasticity for the goods and service that can be taxed. This is the issued linked with the alcohol, tobacco, and petrol. The commodities have inelastic demand, so the rising indirect tax can be forward by the producer to consumers. Therefore, it can be argued that the rise in the direct taxes are visible and may affect the labor quality and quantity more directly. This is outlined in the Laffer curve. Based on the choices, when the rates of income tax are high, the employees will be left with reduced original income that the government can select how to spend. When the rate of income are low, the taxes on the services and goods will high to be compensated, at least the employee will have a lot of money to decide on what to purchase. The buyer can organize the purchases to avoid incurring taxes by purchasing goods with lower indirect taxes exposed on them. Therefore, the tax system with lower direct taxes and higher indirect taxes, it will be difficult to avoid purchasing goods that do not have a hefty tax imposed on them. Based on the externalities, one of the biggest limitations for the direct taxation is that the government cannot use it in forcing the industry in allowing the externalities. The free market will produce excess goods and the sells will incur no tax since no one would operate with such a penal tax system. The biggest question for such a situation is whether the government will maximize the tax revenue intake. It is estimated the peak will happen at around 60 per cent in the United Kingdom. The rate will incorporate the expresses and account that the GDP per cent age. Based on the unemployment and poverty traps, the poverty trap is where the employees in the low paid job lacks incentive pulling himself from poverty with a high paying job since of the resulting loss in the benefits and raised tax payments. For the purposes of resource allocation, the tax charged on the goods or services raises the cost of production. This helpful for allocating resources in the country. For growth and productivity purposes, the government will impose taxes to its citizens. When the dividend and interest rates are high, the citizens will save less money; this affects the amount of cash available for production in investing to business. Some of the economists believe that high taxes will minimize the incentive to operate (Bacon, 2007). Additionally, others think that the tax tends to promote the underground economy especially when the taxes are higher. The United Kingdom government taxes controls the economic behavior. The tax incentives will influence the behavior of the economy. The tax credits will encourage the society and economy behavior. The indirect impact of taxes to the economic will change the behavior of the economy especially the externality taxes that will be imposed on the damaging products, unhealthful, and activities (McCarthy, 2008). The direct taxes have multiple advantages. Economically, the direct taxes are economical in collecting due to their low administration costs. The returns from revenues are high. Therefore, the self-regulation will push the compliance cost though. The direct taxes are convenient and certain. The taxes are normally collected through Pay As You Earn meaning that the tax is taken direct from the individuals through pay slip. Meaning the payment are convenient and certain. It is less convenient for those who are self-employed. The individuals fill the self-assessment forms where an individual is responsible under heavy fines threat for not complying it correctly. The direct taxation are fair is progressive for they fall for the rich than the poor. Thus they can assist in redistributing income and reducing the inequalities by taking much of the wealth. The direct taxes are not inflationary. They do not increase the prices and the economists can be used in curding demand and pull pressure on the inflation (Bond, 2006). The direct taxes are flexible, for they allow the nation to take the situation of the individual into grant and account allowances accordingly. The direct taxes have limitation based on the tax evasion. The direct taxation tends to encourage evasion of tax and the growth for the black economy. The direct taxes have disincentive effect for workers and the firms. The high direct taxes will tends to discourage people from working longer times of taking an extra responsibility since they will gain the limited benefit. The choices between the work and leisure will favor the leisure. For the firms, the high corporation tax will discourage them from boosting and expanding profits. The direct taxes are affected by the tax havens. The lower tax rate in other nations encourages the Britons emigrations to invest abroad. The finance and skills will be lost to the nations. Additionally, the direct taxes are inflexible since they have to be recalculated when a person changes the job and every year in the budget to make inflation rate allowances (Mankiw & Reis, 2010). The flat rate taxes reduced the red tape and minimize the resource that is wasted on the tax forms, enforcing tax laws, and chasing up the non-payers. The flat rated boost incentives for the employees to save and for firms to use profits in investing both of which could raise the potential growth rate of the country. The taxes also generate the rising tax revenue based on the laffer curve idea. Additionally, the flat tax may make the UK economy more attractive to the foreign investment. Conversely, the flat rate takes are not progressive and so the wealth and income distribution will be unequal. Additionally, the flat taxes forms part of the race of the bottom with the nation’s competing with each other offering the lowest tax rates to entice skilled workers and inward investment. If the tax rates are cut, some of the people may choose to operate less since they earn similar income to work for few hours (Sullivan, 2005). There is no assurance that the business will take part in more investment and R and D if the tax companies are lower. Therefore, many indirect taxes tends to make the income distribution more unequal since the indirect taxes are regressive than the direct taxes. Higher indirect tax causes the cost push inflation which leads to rise on inflation expectations. If indirect taxes are high this creates an incentive avoiding taxes through boot legging. The revenue from the indirect taxes is unpredictable particularly when the inflation is low or there is recession that causes a falls in the spending of consumers. Additionally, there is potential welfare loss from consumer surplus and loss of producer. On the other hand, the changes in the indirect taxes change the demand pattern by changing the relative prices and thus affecting the demand. The indirect taxation is an instrument in externalities correction. The taxes can be used to make the polluter and internalize the costs of production and consumption. Subsequently, the indirect taxes distort the choice that individual have to between the leisure and work and thus have less of negative effect on the incentive of work. The indirect taxes can change more easy that the direct taxes. This exposes the policy-makers more flexible. The direct taxes can be altered annually during budget time. The indirect taxes cannot be easily avoided, often individuals are not aware of how much taxes need to be paid (Tait, 2002). Based on the incentive argument, the direct taxes are not considered good especially when they are too high. This is considered to be disincentive to work, which leads to reduction in the workforce quantity and quality. When the indirect taxes are high the price of services and goods will be raised and thus reduce the real income of workers (Helminen, 2009). The extent at which this occurs is dependent on the demand elasticity for the goods and service that can be taxed. This is the issued linked with the alcohol, tobacco, and petrol. The commodities have inelastic demand, so the rising indirect tax can be forward by the producer to consumers. Therefore, it can be argued that the rise in the direct taxes are visible and may affect the labor quality and quantity more directly. The direct taxes of the United Kingdom government are progressive; the VAT is widely proportional because the goods are zero rates. The changes that happened in the 1980s that shifted the system to indirect taxation to direct taxation made the system to be more progressive, but the system was progressive at the beginning of 1980. The change in the system balanced things out. The labour market made changes that helped the households that were considered poor. The rate of income tax was brought in. Generally, the tax system is broadly proportions. The United Kingdom need to be progressive so that the richer members help those who are less fortunate. The problems are though considered to be incentive. Based on the equality factor, the indirect taxes are normally considered progressive. The shift from the direct to indirect made the income distribution in the United Kingdome less equal. Reference Bacon, P. 2007. The taxes. London: Printed for W. Owen.... Bond, D. 2006. Simon's direct tax service: Finance Act 1996 handbook: the provisions relating to income tax, corporation tax, capital gains tax and inheritance tax with explanatory notes and a survey of the act. London: Butterworth’s. Brennan, L. C., & Murphy, R. 2013. Taxes. Mankato, MN: The Childs World. Helminen, M. 2009. EU tax law: direct taxation. Amsterdam: IBFD. Kowalski, K. M. 2006. Taxes. Tarrytown, NY: Marshall Cavendish Benchmark. Macht, N. L. 2001. Taxes. Philadelphia: Chelsea House Publishers. Mankiw, N. G., & Reis, R. 2010. Imperfect information and aggregate supply. Cambridge, Mass.: National Bureau of Economic Research. McCarthy, K. E. 2008. Taxes. Hartford: Connecticut General Assembly, Office of Legislative Research. Sullivan, C. K. 2005. The tax on value added. New York: Columbia University Press. Tait, A. A. 2002. Value added tax. London: McGraw-Hill. Read More