The International Taxation System - Essay Example

Tax System Tax system Introduction Taxation is the only means by which the government earns revenue to support government finance expenditure. Revenues earned from taxes help the government finance welfare programs such as infrastructure and education. Setting up an efficient tax system is however far from simple particularly for developing countries that want to be integrated in the international economy (tanzi V. and Zee H. 2001). Taxes pay for public sector output. There are several characteristics of a good tax system, for example, equality, simplicity, ease of administration, and convenience for all, flexibility and stability among others. Until another invention for earning revenue for the government is developed or introduced then taxation remains the key income earner. Tax incidence refers to balancing of the tax burden between buyers and sellers. Tax incidence changes as often as price elasticity of demand among economic units. In some instances, tax burden may fall entirely on the consumer and this depends on relative elasticity’s of demand, and supply (Hillman 2009). Tax incidence mainly falls on the side that is most elastic between the buyers and sellers (Fullerton & Metacalf 2002). It affects both microeconomic and macroeconomic perspective directly affecting the magnitude loss of either on consumer or producer surplus Many tax authorities rarely put into consideration low income earners when setting up taxing systems. The reason being that they mainly set up a regressive tax system that takes more from low income earners and less from high income earners (Fredriksen 2012). In an attempt to develop an efficient tax system, tax authorities encounter several challenges. The challenges are a major drawback especially in developing countries, but developed countries are not an exception either. Most taxpayers do not have a regular income system as their earning fluctuate from time to time. It is mainly because most people are in the agricultural industry and are paid off informally (Rubinfeld and Daniel 1987). The base for an income tax is, therefore, hard to calculate as these taxpayers do not even use financial institutions or shop in stores where formal bookkeeping can be done to determine an essential tax plan or come up with a solid tax base. Most taxpayers are dishonest with their wages, and this is the major challenge to tax authorities, coming up with a fair tax system is limited by integrity of the individuals (Malcolm 2009). Developing an efficient tax base and a well-defined taxable unit is challenged by integrity of taxpayers. There is also the lack of good tax education; the tax authority personnel are inadequately equipped with knowledge required to come up with an efficient and fair tax system. Tax authorities require well trained and well educated workers. Workers who comprehend the desired characteristics of an efficient tax system so that they can come up with a well and fairly designed tax system. Otherwise, countries will always end up with an undesired system for tax collection (Junko 2003) Presence of an informal economic setting, like lack of financial education to citizens of a country and financial limitations provides inaccurate data for use by tax officers (David 2014). It is because individuals do not disclose their sources of revenue to financial institutions or rather spend their money in informal institutions that are not registered with the taxation offices. Hence, this type of information does not reach the tax authorities. It prevents the tax authorities from developing an adequate structure as there are no clear statistics. It is most dominant in developing countries where people are arrogant to financial systems and financial education. As a result, it contributes to preferring marginal fluctuations as opposed to desired structural changes (Edward 2008) which creates difficulties for tax authorities as there is inadequate statistics for determination of tax basis for different people. Unequal income distribution is a major setback in developing a quality tax system. The inequality leads to an unfair tax administration system, which is mainly a regressive kind of taxing system. Political influence and social powers of the rich people in society shifts the burden of tax to the poor people (Katz & Kearney 2006). It results from unequal availability of opportunities and resources which are a major situation in most countries and hence tax systems rarely achieve desired progressiveness. Hence, the statistics available to the tax authorities are false, inaccurate, and unstable, coming up with a tax base from this kind of data is difficult for tax administrators. It is not only a disadvantage to tax authorities, but is also a setback to economic development (Acemoglu 2002). The government should develop an equal system for sharing resources and redistributing national income to counter such problems (Chandra 1996) Registration of companies with the registrar of companies as mandated by the law is ignored by many newly formed corporations and business units. The law is important for tax authorities as they have a reliable source of information for coming up with a tax base in relation to incomes from registered companies (Besanko 2011). Registered companies may not also disclose their real net worth in fear of paying high tax dues to tax authorities. It provides a wrong tax base which leads to an unfair tax system as opposed to desired equality and fairness of the tax system. Evasion of tax in many countries is a major disadvantage to tax authorities. It occurs more often in large sector firms especially in the real estate business which should provide the most revenue to the country or state (Robert 2013). In most countries, both developing and developed evasion of tax by public and popular figures like politicians is a common problem to tax authorities. It is mainly because tax authorities have no power over them; this, however, creates a shortage in tax revenue as the government spends more than they collect from the public. Tax imposition in such a scenario is difficult to tax administrators (Vivo & Howell, 2011). All taxpayers should be sensitized on being honest in providing information as it is crucial to design an efficient and convenient tax plan (Ruud 2011). Tax authorities suffer inadequate information as a result of foreign trade, due to fluctuating exchange rates and lack of proper knowledge on what is being imported or exported. Thus, determining a tax base is difficult. Therefore, the authorities end up using inaccurate figures, hence, the discrepancies in the tax system (Edward 2008) Incidence or tax burden depends on market elasticity’s of demand and supply. Elasticity is the responsiveness of quantities demanded or supplied to change in respect to prices and several other market determinants. (Mark 2008). To identify tax incidence it is crucial to identify market equilibrium achieved by the tax, however in several circumstances the seller shifts the whole tax burden on the consumer (Connolly & Munro 1999). Tax incidence is the difference between before tax market equilibrium and the after-tax demand and supply prices. Elasticity of the good determines the extent to which the burden of the tax will be borne by the consumer. With goods that have inelastic demand, consumers are not as sensitive to changes in prices of goods as the quantity is slightly reduced. In such a situation then the burden on tax falls entirely on the consumer. An example is for addictive goods like cigarettes, nuts, and narcotics. Even if the price is raised the consumer does not have options and so the tax burden is shifted to him. When demand is more elastic than supply, then, the consumer will bear a larger tax burden (Stephen 2004) The vertical equity principle suggests that when individuals are not in the same wages or salaries bracket they should be taxed differently to allow for equity (Andrew & John 2002). However, this is not the case in many countries in the world. It is not the case because taxes are imposed either, the same for all income earners, in that there’s a flat rate for all tax bases or, it could be a progressive tax system whereby, the tax increases as the earnings of individuals increase. In some instances, however, low-income earners pay more taxes than the high-income earners, regressive tax system. The government can take several measures to correct a regressive or flat rate tax system and advocate for a progressive taxing system. Promoting equity in income and resource redistribution will play a great role in increasing tax base for low-income earners so they won’t suffer much in paying higher taxes than they can actually manage. It also contributes to a stable employment-population hence reduction in poverty levels as well as promoting economic growth (Hillman 2009) Fiscal policy which is concerned with how the government manages its spending, tax, and public debt is another tool the government can make use of to regulate taxes paid by the middle class and low income earners (William & Michael 2012). The government should ensure a reduction in government expenditure, this way low-income earners do not pay much as it has an effect on the gross national product. Increasing direct and or indirect taxes on goods and services and also keeping watch on a budget to ensure that the country does not suffer budget deficits in recurring financial years. The government should bank more on property and income taxes rather than just relying on retail sales tax (Jayapal 2014). It may also involve getting more sources of revenue rather than just relying on the taxing system. The education system needs to be improved, to ensure the curriculum educates students on the outside world rather than just focusing on disciplines selected like engineering, architecture and music among others. With a good education system, many businesses will be set up than relying on white collar jobs, and this increases profits, which are a long term source of state revenue (Geoffrey 2014). With a great education system tax authorities can design a taxing system that favors all inequality and convenience. The government may impose lower tax rates on books, magazines and newspapers to encourage more reading (Lawrence & Lawrence 1986). Advocating a corruption free society and sensitizing citizens on the need to be honest in their duties. Corruption is the main reason the rich end up paying little or no taxes leading to a regressive taxing system. Political affiliations also contribute to an unfair taxing system. The government should ensure tax authorities are not biased based on social classes and power associated with the rich in society in setting up a system. The government should act against bias in the tax. Tax authorities should work against the policy that seeks to favor special interests over general public interests. It should be incorporated in the constitution to maintain law and order (Harry 1999). The government should ensure tax authorities don’t give preferential treatment for taxes to public figures like politicians as this shifts the burden to low-income earners. Tax authorities should work in hand with the government to catch up with those who evade taxes. They should ensure everyone pays taxes to avoid shifting the burden to a certain group of people, whereas, everyone benefits from these taxes (Dalsgaard 2000). Conclusion Tax authorities are bound to design a tax system that is fair, convenient, flexible and simple to understand and use by all means for the growth of the economy and more so an equitable revenue collection strategy. Governments of various countries should then invest in alternative methods of revenue collection because based on the tax research so far; taxation is not sufficient for the government expenditure as most countries seem to have public debts and budget deficits. They can combat such shortcoming through various methods such as equal income and wealth distribution among citizens of their respective countries. Watching resource distribution is a major remedy to unfairness in the tax system. The government should also develop fiscal policies that prevent inflation and other market externalities. All tax authorities should appreciate a progressive tax system that advocates an increase in taxation as the tax base increases, this protects low-income earners from bearing the largest tax burdens. Sensitization of both buyers and sellers on tax incidence should be done with a lot of caution. It ensures that taxes are not shifted to either party wholly, but, rather should be shared equally to avoid buyer or seller exploitation. References Acemoglu D., 2002, Technical Change, inequality and the labor market. Journal of economic literature, vol 40, no1 Andrew L. and John H. 2002, The International Taxation System, Springer press, New York Benjamin L. 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