Attributes of a Tax System Which is Beneficial to the Economy - Case Study Example

Attributes of a tax system, which is beneficial to the economy: The present tax structure of the UK economy in the light of changes announced by the Chancellor of the Exchequer since October 2010. Introduction An efficient taxation policy meant for accounting the expenditures needed for producing government goods and services can be evaluated depending on some key parameters. These parameters like the revenue earning capacity of the tax structure created, efficiency of the tax structure, equal distribution of the tax burden and system of accountability not only help the government in formulating the tax structure but also in evaluating the efficiency of the same. In regards to the revenue earning capacity of the tax structure created it must be seen that keeping the other parameters constant it helps the government to draw an optimal amount of revenue from the society. The tax structure so formulated must also be flexible to economic changes. In other words, it must help draw more finance from a growing economy. The tax structure designed must give space to proper planning and budgeting functions to absorb the shock of economic downturns. The taxes imposed by the government render an adverse effect on the society. Taxes like Income Tax, Excise Tax, and Property Tax can dissuade the persons from working more to generate income, and in procuring certain goods and property. Moreover, taxes imposed upon the society also augment social cost. Thus, efficiency of the tax structure formulated gains ground in minimizing the effect of the above risks. Tax structure formulated must be divided along the society depending on the paying potential of the masses. The distribution also entails seeking the maximum revenue from the potential users of public goods and services. Finally, the tax system must have transparency in its dealing with the society. The people must have a clear knowledge about the reason that they are paying for. (Shaffer, Deller & Marcouiller, 2004. pp. 178-180; principles of a good tax system, n.d.) Thesis Statement In the light of the above discussion it is understood that a fair system of tax policy is that which is beneficial to both the government and as well as to the society. Keeping in tune to the previously mentioned statement the current position of the Tax Policy of United Kingdom is analysed. Moreover, the announcement made by the Chancellor of Exchequer in October 2010 centered on making simplifications to the formal system of taxation in the country to look into the interests of the poor and middle class.(House of Commons, 2010). The changed outlook of the government of United Kingdom towards making a fair and simple tax system bore a strong implication in changing the tax structure of the country. The Tax System of United Kingdom In a survey made on the revenue generated by the taxation policy of United Kingdom it is found that during the period of 2008-09 the total amount of revenue earned amounted to 545.5 billion Pounds. The revenue generated stood at 37.3 percent of the Gross Domestic Product of the country. In citing a break up of the revenue generated it is found that it amounts on an average to 10,900 Pounds paid by the adult population of the country. In addition to the revenue generated through taxation measures the surplus obtained from the operations of public sector enterprises together with the rent derived from government properties all help to achieve the stated revenue. In regards to the Income Tax system of the country it is found that, income tax fails to be imposed on all patterns of income in the country. Income Tax in United Kingdom is levied upon income generated from employment, self-employment, and pension schemes of retired persons, revenue generated through ownership of property and from banks. Moreover, allowances given to the unemployed for job-seeking purposes and income obtained from shares are also taxable under Income Tax. However, the Income Tax is calculated on the revenue earned after rendering certain deductions through allowances. The Income Tax is derived from the income generated in United Kingdom by deducting such from the source. The ‘Tax Deducted at Source’ policy is referred to as ‘Pay-As-You-Earn’ in the context of United Kingdom. Further, the Income Tax policy practiced in United Kingdom is calculated on a cumulative note on the total annual income of a person. Tax payable annually calculated on the basis of income is adjusted against the tax paid to arrive at the remainder. The remaining tax is then divided into months and weeks payable. In regards to the Value Added Tax (VAT) policy of the United Kingdom government it is found that the rate had been reduced from 17.5 percent to 15 percent in 2009. In case of domestic fuel and power, the Value Added Tax is charged around 5 percent. Indirect Taxes in United Kingdom like Excise Duties are mainly used to conserve natural resources and to curb the propensity of people to alcohol and tobacco products. Further, in addition to Value Added Tax and Excise Duties the government generates revenue also through a pattern of licenses levied on carbon emissions. United Kingdom also pays due consideration in regards to Capital Gains Tax levied. It is found that Capital Gains Tax earns due exclusion from groups whose annual income is around 9,600 pounds. Moreover, proceeds obtained from sale of homes, private vehicles, and income obtained through pension funds are also excluded from Capital Gains. The Tax system of United Kingdom also renders tax credits for children and low-income households. (Adam & Browne, 2009. pp. 3-9, 14-17, 20; McCrae, 1997. p. 320) System of Improved Taxation The cause of improving the tax system of the country helps in achieving social welfare of the citizens. However, such improvements may denote a less development on the revenue growth through taxation measures of the country. Keeping in tune to the said statement the government to achieve a long-term growth pattern must reduce the effect of labor taxes and render more taxes on capital and consumption goods. On the contrary for welfare generating purposes the government can go to reduce the tax rates on consumption and capital items and subsequently augment the tax on labor to balance the effect. Thus, it increasingly pursued by countries like United Kingdom to reduce the effect of taxes more on capital items and levy such on labor costs to promote a welfare state. (Angelopoulos, Malley, & Philippopoulos, 2008. pp. 22-23). An analysis on the tax system of United Kingdom In the context of United Kingdom it is found that the benefits derived from the amount of contributions made is much lower. It is because the National Insurance Contribution scheme is being closely tied up with the Income Tax policy of the country. Moreover, the discrepancy between benefits derived and contributions owe to the fact that benefits derived out of state funding activities like the National Health Services tends to be much lower than the contributions made to it through National Insurance Contribution program. Further, in United Kingdom people perceive a tendency of the government to resort to indirect taxes rather than to direct taxes. This in turn reduces the visibility and transparency of the amount of tax charged and leads to ambiguity. Moreover, the patterns of indirect taxes tend to increase more with a rise in inflation. It is also increasingly observed that the parliament of United Kingdom does not take any proper scrutinizing measures before initiating any tax reform in the state. This leads to ineffectiveness of the reforms laid. In regards to the fiscal policies of the government of United Kingdom it is observed that the current practice of generating them does not acquire any legal support. Moreover, the nature of fiscal policies entailed are also found to be quite complex and do not center on any state matters. (Alt, Peston & Sibieta, 2008. pp. 47-50). Changes announced in the Tax system of by the Chancellor of the Exchequer in United Kingdom The Chancellor of Exchequer in the United Kingdom has announced the simplification of the prevalent tax system practiced in the country. To this end, the Chancellor of Exchequer mentioned that the government of United Kingdom has created a separate and independent office. This office created was entrusted with the responsibility to take care of the tax simplification process of the country. The Chancellor of Exchequer pointed out that owing to the activity the tax system would be made less complicated as desired by the businesspersons and tax professionals. Moreover, in addition to making the tax system simple in understanding and approaching the Chancellor of Exchequer in United Kingdom also rendered stress on creating a fair approach. In that, the Chancellor of Exchequer mentioned that the current tax system would center more on addressing the needs of the middle and poorer sections of the society. To this end, the Chancellor of Exchequer mentioned that in the budget published in June the government has created a further provision of 1000 pounds in the field of personal allowances. The fund thus created would help to make a strategic move in drawing out around 880,000 taxpayers from lower income groups by the financial year 2011-12. However, the government of United Kingdom is found to make a slow progress in granting of registration to small business firms to Value Added Tax sector. This, the government of United Kingdom states is a definite step to reduce the amount of fake registrations. The government’s act of simplifying the tax system would entail collection of information from areas which earns due complexity and thereby to deliver a simplified form of tax system.(House of Commons, 2010; Office of the Tax Simplification, 2010). . Further, it is observed that in the announcements made the question of raising funds was split based on the Pareto Principle. The government of United Kingdom mentioned that around 80 percent of the fund would be collected from other investment functions while 20 percent of the revenues would accrue from tax increments. Further, in regards to Capital Gains Tax the reforms cited by the Government of United Kingdom mentioned that the rate of Capital Gains Tax would be raised to 28 percent to draw in the maximum from richer sections. However, it also mentioned that the rate of Capital Gains Tax would remain the same at 18 percent for other than the richer section of the society. The amount of annual exemption fixed for the Capital Gains Tax would stand at 10,100 pounds. In regards to foreign funds the rate of Capital Gains Tax was fixed at 44.8 percent. In regards to the taxation system of corporate sectors, the Chancellor of Exchequer exclaimed that the rate of Corporate Taxation would be reduced from 28 percent to 24 percent. The rate of taxation in the case of small enterprises was mentioned of being reduced by 20 percent. (A Budget, by George!, 2010). Conclusion The tax system of United Kingdom is observed to be set of complex financial doctrines, which failed to create an impression in the minds of people. Moreover, the tax system of United Kingdom lacked the sense of clarity as it depended more on the system of indirect taxes. The rate of indirect tax would increase with a rise in inflation giving nom clue to the persons about the amounts they need to pay. In this regard, the Chancellor of Exchequer in United Kingdom stroke out a plan through which the Government of the state opened up an independent office. The office created would help in reducing the complexity of the tax structure and would help in making the system understandable to common logic. Moreover, the Chancellor of Exchequer also highlighted to focus on the poor population by creating separate tax provisions. This would help the poor people to be safeguarded from the realms of spending on taxes. The modern tax system of United Kingdom also lays focus on reducing the amount of corporation tax amounts for big and small enterprises. Again, in regards to Capital Gains Tax the government of United Kingdom as highlighted by the Chancellor of Exchequer to collect more from the richer sections through increased rates. References 1. Angelopoulos, K., Malley, J. & A. Philippopoulos. (2008). Tax Structure, Growth and Welfare in the UK. available at: http://www.gla.ac.uk/media/media_68955_en.pdf (accessed on November 25, 2010) 2. Alt, J., Preston, I., & L. Sibieta. (2008). The Political Economy of Tax Policy. available at: http://www.ifs.org.uk/mirrleesreview/reports/political_economy.pdf (accessed on November 25, 2010) 3. “House of Commons” (2010), parliament.uk. available at: http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm101012/debtext/101012-0001.htm (accessed on November 25, 2010) 4. Adam, S. & Browne, J. (2009). A survey of UK Tax System. available at: http://www.ifs.org.uk/bns/bn09.pdf (accessed on November 25, 2010) 5. McCrae, J. (2007). Simplifying the Formal Structure of UK Income Tax. Fiscal Studies. 18 (3). Pp. 319-334. available at: http://www.ifs.org.uk/fs/articles/fsmccrae.pdf (accessed on November 25, 2010) 6. “Principles of a good tax system” (n.d.), tutor2u.net. available at: http://tutor2u.net/economics/content/topics/fiscalpolicy/tax_principles.htm (accessed on November 25, 2010) 7. “Office of the Tax Simplification” (2010), ion.icaew.com. available at: http://www.ion.icaew.com/TaxFaculty/20329 (accessed on November 25, 2010) 8. “A Budget, by George”, pwc.com. (2010). Available at: http://www.pwc.com/jg/en/issues/the-chancellors-emergency-budget-summary-June-2010.jhtml (accessed on November 25, 2010) 9. Shaffer, R., Deller, S. & D. Marcouiller. (2004). Community Economics: Linking Theory and Practice. Wiley-Blackwell. Read More