Taxation in the UK Economy - Coursework Example

Taxation in the UK economy Part A Reasons for taxation Taxation in the United Kingdom is quite an interesting idea that deals with economics. It involves payment of citizens to the government in the country which is the central government and the local government. In such country which has two government, the citizens are taxed a lot of money for taxation. The central government revenue is got from the income tax of the citizens, national insurances, VAT (value added tax), corporation and fuel tax. The local government collects tax from the giants identified in the central government who collect their funds including the business rates. There are many reasons why taxation is practiced by the government in any country. One of the main reasons is to pay expenditures for the government. The expenditures includes, paying for the public expenditures that happen in the daily life like cleaning the environment and maintenance of the cities. All this is managed by the government and catered for by the revenues the citizens are taxed. The country may lack enough revenues and decide to borrow which is not a secure act. It is good for the country to maintain its economy by using more of the taxation money for such expenses in order to avoid dangers like inflation. By doing so, the public goods produced in the country and the merits can be well be provided from the taxation fee than borrowing the fee from outside country which may affect the country very heavily. The current UK budget can clearly show how the taxation is utilized by introducing austerity measures which raise the VAT and cut the costs of the public services. Recently, billions of cash was cut from the budget of the new coalition government of the UK. All the departments except the health and oversee aid cut their spending to over 25 percent where by it created a chance of making 750, 000 new jobs (Finney 2005). This looks because the government has created new job opportunities in the country. Another reason for taxation is for the government to correct the market failure. The government has the right to intervene into the individual markets in the country to govern them and correct them by lowering or raising their taxes. This is majorly to increase or decrease the demand of the goods and services. The demand of demerits goods such as cigarette can be reduced by increasing its taxes. This is for the better of the country by discouraging the citizens not to be taking the cigarettes and polluting the environment. On the other hand, products like books and educational goods can be exempted from raising the taxes and instead reduce their taxed to increase demand. In the UK, such goods are exempted from the VAT in order to promote them. Such roles from the government introduce the programs that reduce consumption of the cigarettes and alcohol drinking and instead divert the attention to the best consumption goods. Another reason of taxation is for the management of the economy. For the economy to be balanced the government needs to apply a fiscal policy for the influential of the variables like unemployment, inflation and the balance of the payment depending on the demand size. The country has started programs that raise the standards and the adoption of the management quality. This is also related to the demand size where by the spending is increased which in turn the budget deficit which eliminates the issue of borrowing from the neighboring. UK has also introduced the supply side policies which have led to the 10 years gap of the country in its profile. The supply policy enables the markets and the industries in the country to operate efficiently with no problem. This increases the national output of the country leading to the growth of the country’s economy. The policy makes the LRAS curve to shift to the right making the potential output of the country to increase (Hutton 2008). The UK government believes that if it improves the supply side of the goods, it will experience a positive growth and the chances of inflation will be reduced. On the other side, supply alone can not lead to the growth of the economy but also the AD level of the country must also be high to get a good production. This has also led to the fall of the capital investment in which the demand is increased. At the same time this has an effect to the aggregate supply of the UK government. The supply side of the government is required to impose tax relief and also reduce the reductions needed for the corporation tax. There is a weakness in the UK economy because of the high taxation and the increase of demand of some goods. The capital investments of the UK economy have dropped and the government needs to lower the taxes and introduce the necessary easier planning programs. The productivity of the UK was higher in the year 2007 than in the year 2011. The main reason for this is because of the supply side of the government. (Figure 1) Figure one explains the output of one worker in the economy of UK and the capital investments spending in the years 2003 to 2012. Another major reason of taxation is that it is the one responsible for redistributing income. In some cases, some places of the country can be inequitable than other places having a lot of revenues. The government solves such problem by imposing high taxes which reduces the income and wealth of the rich places. This increases the income and living standards of the poor people in the country (Ricardo 1999). Part 2 Effects of direct tax in the UK economy The UK governments is currently shifting from the direct taxes and moving to the indirect services because of the effects that affect the economy of the country. This affects the potential demand and the supply side that are deeply affected by the direct taxation of the UK economy. Indirect taxes greatly have an advantage over the direct tax in the country because of the economic incentives. This is an effect mostly in the labor market that affects the economy growth of the UK government. When taxation is increased in the government, there is a removal of the problem that faces the overall tax and the income and the capital being raised. As the result the income tax of the country and the tax corporation rates are decreased in order to meet the equilibrium (James 2009). In the supply section of the economic growth, it is recommended for the government to practice indirect taxation than the direct taxation because most of the civil workers in the UK make up a less disincentive to work. The main reason for this is that, more of the workers in the country decide to remain with what they earn. They are fond of saving their incomes than what they can spend. It has also been proved that the civil workers of the country always obey the rule of the marginal tax rates. It means that they add more working hours for them to earn more hence increasing their productivity. By doing this, they affect the economy of the country by raising the long run output of the country creating an expansion in the aggregate supply forming a force of the general price level to drop. Figure 2 The graph above (figure 2) explains the taxation of the civil workers in UK in terms of their gross income. It further explains more on the income tax increase as compared to the employee’s and the local taxation income. The aggregate Demand Curve With the aggregate demand graph, the direct tax failed in the UK economy which led to the introduction of the indirect tax. Taxation has been a problem and the country has increased the rate of taxation hence reducing the AD irrespective of the level of the price. This makes the households to have no more money to spend. As a result, the investment cost of the UK economy has been reduced. The classical Aggregate Supply curve When the AD line changes, the price level will also change and the real output will be constant. Laffer curve The UK economy has also reduced the corporation taxation which has led to the growth of the economy. In the year 2010, the rate was reduced from 28 to 22 percent and in the year 2015 it was reduced to 20 percent. The figure presents the cut from the highest deficit to the lowest. The income taxation of the country will affect its economy in relation to its change. For the citizens to work for more hours, the governments will be required to lower the income tax hence causing two important effects to the effect of the substitution and the income effect on the country. When the cuts rates of taxation are reduced, it is obvious that the working extra return hours will rise. This will make the opportunity cost to the workers’ leisure time to increase than the previous period. With the effect on the income, the increase of tax rates will make the people to get more chances to attain their targets making it easier for them to prosper. They will also work for few hours and attain their goals such easily. In some extent, they can decide to have enough free time and still be earning their income easily. Comparing the effects, there is an effect that is more hazard than the other when the tax rates of the country are reduced. Within the context of the tax payers, their researches concerning the field study are not valid. When one compares the house holds where most of the problem is based on the poverty and unemployment, their incentives are always increased because of the direct reduction of taxation and indirect increase taxation. It is always common that the people who are unemployed and the ones with low paying jobs will have a low yield of the incentives if they decide to take a good job and work for extra hours. The extra income they earn can be regarded to be the income tax hence avoiding the additional incomes. Other extra cash can be converted to be for insurance and for the tested means nationally (Staples 1927). With the direct taxes, there can be the disincentives postponing in terms of the consumption by the saving of the citizens and for the firms to invest in new inputs of capital. In the UK government there is an interest given on the new accounts that are saving and it is taxed with the source information. The source information includes the new act in the UK government that confirms that 10 percent rate is taxed from the low income earners who have few savings. This is an advantage over the indirect taxation where by it greatly support the saving hence reducing the high levels of the duties hence minimizing the consumption. With the indirect taxation, it can be used in solving the market failure problem caused by the damage of the environment. Most of the governments including the UK government use the indirect taxation simply to cater for the environmental objectives. When a country has a problem over the external problem, the use of the indirect taxation is the solution because both the producer and the consumer are both charged the same cost making the demand to respond as required. Most of the people argue that, the best way to protect the environment is by using the tax, which is the major cause for the pollution. With the direct tax, there is an increase in the prices increase and the consumption will be reduced hence minimizing the effect that can affect the environment (James 2009). With the supply side effect of the economic growth of the country, the main key focus is on the incentives, the enterprise, technology, mobility and the efficiency and flexibility of the economy. The country has to make sure that there is increase in the labor and productivity of the capital. The capital spending of the firms can also lead to a change on the aggregate supply increasing the demand of the aggregate. The distribution of income can be another effect on the imposing of direct taxation because it is such an equitable and progressive method because of the increase of the income tax that has been paid. This is the opposite to the indirect taxation because it is a regressive trend. The main reason for this is that each person pays a rate that is the same irrespective of the purchases. A perfect study is on the production of tobacco in the UK country where it is produced in a high level. There are statistics from the national level that the tobacco duty acquires a larger portion of the incomes that are disposable. Figure 3 Figure three clearly shows how the percentage of the income being disposed is being distributed in the groups. Conclusion The major point in the case of direct taxation, a problem from one particular position can not be shifted or be transferred. One of the major problem in the direct tax is that it has a lot of problems in terms of administrative inefficient experienced in the offices more so from the UK economy. The whole direct taxation process and effects to the economic growth of a country depends on the current economic growth of the country. If a country has a low economic growth there will be a drastic drop of the living standards of the citizens and the economy will also drop. A country that is poor has no chances of having a scope for the direct taxation as compared to the rich country. In the current economy of the world and the competition among the growth among the countries, direct taxation is not such a major key in the current financial system. Although direct taxation has got benefits like equity, because it gives the social justice whereby one has to have the ability to pay the tax and the tax is taxed according to one’s economic standard. The government can also realize how much it should collect from the people since it is planned in advance. The direct taxation is also elastic in a manner that the increase in the income and wealth will lead to a high tax rate. With the direct taxation, it is not the best because; there is tax evasion due to the administration which is poor. The rates of the taxation also tend to exaggerate becoming inconvenient to most of the people. The taxation is also inconvenient in a manner that the whole process involve many procedures that are not meeting the returns’ requirements. The process also covers a very narrow coverage because the government does not get enough funds as required. References FINNEY, M. (2005). UK taxation for students: a simplified approach. London, Spiramus. HUTTON, M. (2008). Tolleys UK taxation of trusts. London, LexisNexis Tolley. JAMES, M. (2009). The UK tax system: an introduction. London, Spiramus. RICARDO, D. (1999). The principles of political economy & taxation. London, J.M. Dent & Sons. SCHWARZ, J., & DAVIES, D. (2008). Booth: residence, domicile, and UK taxation. Haywards Heath, West Sussex, Tottel Pub. SHIPWRIGHT, A., & PRICE, J. W. (1989). UK taxation and intellectual property. Oxford, ESC Pub. STAPLES, R. (1927). Taxation. London, Taxation Pub. Co., etc.]. Read More