International Taxation: Policy and Practices - Example

International Taxation: Policy and Practices Contents Introduction 3 Discussion 3 Equity canon 4 Certainty canon 6 Convenience canon 7 Economically efficient canon 8 Conclusion 9 References 11 Introduction In last few years people of USA are significantly showing their concerns with their current tax policies and practices. People are finding it very difficult to manage with ongoing trends of U S taxations. Current U S taxation follows the progressive system under which system taxations are being imposed on the basis varying income levels of people. Rick Perry the Texas Govern and Republican presidential candidate has come up with a new idea of 20% flat tax rate system. This idea has developed lots debates in the American taxing system. Rick Perry has categorically commented that, Democrat ruled U S government spends too much money for unnecessary purposes. He also added that Current taxation is significantly high and it is a very complex factor to handle by the common people. Rick Perry has stated that this is the high time for U S government to come up with 20% flat tax policy. Current U S taxation has significant extent of ambiguities and it has high extend of biasness towards the special interests. The situation is highly unstable and president Obama is facing high degree of pressure from the domestic political union. Currently taxation rate of U S people varies from 10 percent to 35 percent. This varying nature of taxation rate has created significant dissatisfaction among the common people. To handle this critical problem, Rick Perry has come up with an idea of 20% flat tax policy which will be analyzed with the help of Adam Smith’s Canons of Taxation (Perry, 2011). Discussion Flat tax rate is a system of taxation where each of the taxpayers has to pay equal percentage of tax. In this kind of taxation, income levels of the people are not taken for the considerations. In the context of flat tax system there is no deduction or exemption is permitted. In the system of flat tax rate, marginal rate is fixed and the marginal rate is already being determined by the tax authorities. Flat tax rate is significantly suitable for the individual who are having high incomes. With the help of this taxation system generally people are not over penalized for their high degree of productivity. As the tax rate is fixed, people consider this tax system fair and free from any biasness. This kind of tax system is free from any kind of inequality and it is highly encouraging system for the people who have high income. Progressive taxation system forces the people to pay their taxes according the fluctuating nature of their incomes but flat tax system does not consider income level of people. This taxation system is generally being considered as a transparent taxation policy. Flat tax rate provides simplicity to the overall taxing system. The system does not encourage any kind of deduction that is why the system is highly effective and very simple to follow. According to the version of pro flat tax people, flat tax approach makes tax code compliances significantly easier. Taxation has high degree of complexity associated with it. Progressive taxation has high degree of limitations to reduce all those complexities. All the taxation related complexities can be easily handled by the flat tax policy. Double taxation is also a financial downfall related with progressive taxation system. That negative impact of double taxation can easily be lessened with the help of flat tax system. For the benefit of high economic growth flat tax system is highly effective. This system encourages high productive people to contribute more productivity into the overall economy. Adam Smith came up with taxation principles in 1776. He described four taxation principles. Those taxation principles are famously known as four canons of Adam Smith. Those four canons are equity, certain, convenient and economically efficient (Hall and Rabushka, 2007). Equity canon According to the Smith’s canon of equity, tax should be collected in a proportionate way. It means tax should be collected as par the income level of the people. The canon indicates that people should pay taxes according to their levels of income. This canon of Adam Smith is not falling in line with the new concept of Texas Governor Rick Perry. Rick Perry is suggesting 20% flat tax for all income level people. This suggestion is directly violating the basics of this canon. This canon of Smith clears that, high income people get extra benefits from the Government and other authorities. That is why high income people should give high income tax. The canon also has categorically stated that, people should be taxed according to their abilities. Here in this case of 20% flat tax rate, that basic principle of Smith is missing. With this new taxation concept brought by Texas Governor, people who generally pay 10 to 19 percent tax will have to pay more taxes (Hall and Rabushka, 2007). This over burden of tax may be beyond the ability of some common American people. The canon of Adam Smith is totally against of a generalized or flat tax rate for all people. The canon has significantly criticized the policy of flat tax system 300 years earlier only. He added that generalized or flat tax rate can over burden low income people, because they would have to pay high taxes for low income. The current idea of Rick Perry is not at all satisfying this canon of Smith. Equity cannon of Smith has indicated that burden of taxation cannot be distributed properly with the help of flat tax system but the Republican Presidential candidate is trying to distribute the burden of taxation with 20% flat tax rate only. It means this new concept of Rick Perry is going towards the opposite direction of Adam Smith’s equity canon. The Republican politician is trying to come up with an alternative with the help of 20% flat tax rate. If this alternative can be seen through the lens of equity canon of Smith, then it can be easily analyzed that the policy is not at all supporting the equity canon of Smith. With the help of this equity canon Adam Smith has tried to safeguard economic and social justice for all income level people. The new 20% flat tax system of Perry is significantly undermining that economic and social justice aspect. All the above arguments and discussions are indicating that Perry’s newly suggested 20% flat tax system is not following the canon of equity described by Adam Smith (Gibson, 2012). Certainty canon Adam Smith has tried to describe an important principle of taxation with the help of certainty canon. According to the canon of Smith, taxpayers should be perfectly informed about their amount of the tax payments. It means there should not be any scope of uncertainty about their tax payments. Recently Texas Governor Perry has come up with a new suggestion where he has talked about a fixed rate of tax for all people. This new suggestion will allow the people of America to calculate their taxes with high degree of certainty. With this new concept of Perry, people will be able to calculate taxes in a simple fashion. It means 20% flat tax rate is perfectly falling in line with the canon of certainty. Currently people of America are facing significant uncertainties with the current progressive tax system. In this context of uncertainty, 20% flat tax rate can provide high degree of certainty as far as the taxpaying is concerned (Wood, 2004). According to the cannon of certainty, tax amounts are should not be random at any point of time and it should be free from any kind of biasness and discretionary approaches of tax collecting authorities. In this aspect also the newly developed idea of Rick Perry is following the basic rules of certainty canon. With this new concept of Perry, taxpayers will not have to pay any random amount of taxes. This new concept of taxation has no scope of discretionary approach and biasness from the side of tax collecting authority. In the current progressive taxation system tax amounts of the American people fluctuate significantly which create an environment of uncertainty for American tax payers. This fluctuating uncertainty can be easily eliminated with the help of proposed 20% tax policy. This policy will support American people to calculate their income tax amount without any difficulty. This canon of Adam Smith has categorically stated that tax authorities across the world should be certain about the amount of their tax collections. It means Government or tax collecting authorities should be certain about the possible amount of tax they are going to collect. The newly suggested policy of Texas Governor can provide that certainty to the tax collecting authorities as well. By implementing this new policy Federal Government and its tax authorities can easily calculate possible amount of tax to be collected. It indicates that Perry’s newly suggested tax policy is perfectly falling in line with the canon of certainty (Wood, 2004). Convenience canon Canon of convenience is also an important tax related principle described by Adam Smith. This canon gives significant focuses towards the conveniences of tax payers. The fundamental principle of convenience canon is taxpayer’s conveniences should be given extreme priority. Rick Perry in his new concept has stated that, taxes will be collected with the help of postcards. It indicates that, the Republican Presidential candidate has not undermined the conveniences of taxpayers. He has shown enough focuses towards making the policy convenient for taxpayers. Adam Smith, with the help of this canon has tried to showcase one thing that, convenient taxpaying system always encourages high numbers tax payments. It represents tax payment as a responsibility not as a compulsion (Hall and Rabushka, 2007). This canon of Smith has also tried to make one point that, if the tax payments are convenience enough then tendency of tax avoidance also get reduced. Here in this case Governor Perry has tried to create taxpaying as much convenient as possible. It means suggestion of Rick Perry has high degree of alignment with the canon of Adam Smith. As far as the current progressive American tax system is concerned there is significant scope of inconveniences. Big reputed firms of the country with their appropriate resources always try to find the ambiguities of complex and inconvenience tax policy. This factor can be eased with the help of 20% flat tax approach. The new tax approach will be easily understandable and the big organizations will not be able to exploit simplicity of the approach. The new approach suggested by Rick Perry will also encourage reputed organizations to pay their taxes properly. With the help of this new tax system, old American people will not have to pay taxes on their Social Security Benefits. This convenience will be applicable for 17 million Americans. This fact is reinforcing that; Perry’s new flat tax approach can create conveniences for old taxpayers. This approach is definitely suitable with the canon of convenience. With the current progressive tax system all the incomes are considered for taxation. In the new approach of Perry, only the country specific incomes are going to be considered for taxation. It can create significant conveniences for the people of America. All the above discussions and facts are clear that Rick Perry’s proposed policy is absolutely well-suited with the convenience canon of Adam Smith (Wood, 2004). Economically efficient canon 300 years ago Adam Smith has categorically stated that, economically efficient tax collection is significantly important. This canon has indicated that there should be presence of economic efficiency in the tax collection process. According to the description of Smith, amount of tax collection must be greater or higher than the cost of tax collecting. It means to maintain economic efficiency of a tax policy, administrative cost of collecting the tax should be lesser than the collected amount of tax. This economically efficient factor has been found in the context of Perry’s 20% flat tax policy. The new tax policy has given significant focus towards reducing the administrative costs of tax collection. The newly proposed approach can save up to $483 billion compliance costs related with tax collection. It will certainly reduce the administrative costs of tax collection. The postcard approach of tax collection will certainly maintain economic efficiency of the proposed tax policy (Lofgren, 2012). The current U S taxation system is very huge in nature and has high degree of complexity. To maintain this huge nature of taxation Federal Government incurs high amount of administrative costs. High administrative costs reduce economic efficiency of taxation. This issue can be easily addressed with new approach suggested by Republican Presidential candidate. The new approach proposed by Texas Governor, will allow the country to restrict their Federal spending limit up to 18% of the country’s GDP. This restriction will provide high degree of competitive advantage as far as the country’s overall economy is concerned. It indicates that the approach is economically possible enough. Apart from Federal cost reduction, the newly suggested tax policy can generate employment also. All these factors of Perry’s policy are absolutely following the suits of the Smith’s canon of economically efficient. It is indicating that policy of Rick Perry has significant alignment with the canon of Adam Smith. To describe policy, Governor Perry has categorically criticized the over spending nature of the Democrat ruled Federal Government. He has rightly criticized that in 2010, Federal Government has spent $1.3 trillion more than their collected tax amount. It means the current progressive tax system is not at all economically efficient. It has to be replaced with 20% flat tax rate policy (Lofgren, 2012). Conclusion Current US taxation policy is not at all free from criticism. That is why people are coming up with alternatives. Here in this study, Texas Governor and Republican presidential candidate has come up with a suggestion of alternative flat tax policy. He has suggested 20% flat tax rate for all American people. The concept of flat tax rate has been described in an elaborated fashion. It has been observed that, newly proposed policy of Rick Perry has been analyzed on the basis of Adam Smith’s four canons of taxation (Lofgren, 2012). The new tax policy suggested by Perry is not falling in line with the equity canon of Adam Smith but the policy has high degree of alignments with rest of the three canons. The cannon of certainty, convenience and economically efficient is highly present within the new proposed tax policy. Fixed tax rate has brought certainty and tax payments through post cards have brought about both convenience and economically efficient factor into this policy. This kind of flat tax policy is very common in the case of other countries as well. Russia has been significantly benefited with 13% flat tax policy and provided 5% economic growth to the country. European country France and Asian country like Hong Kong are also using this kind of tax policy. The flat tax policy of Perry is highly favorable for the purpose of implementation (Burman and Slemrod, 2012). References Burman, L. E. and Slemrod, J., 2012. Taxes in America: what everyone needs to knowrg. London: Oxford University Press. Gibson, G. C. 2012. Global networks of power: volume one. New York: Lulu.com. Hall, R. E. and Rabushka, A., 2007. The flat tax: updated revised edition. Stanford: Hoover Press. Lofgren, M., 2012. The party is over: how Republicans went crazy, Democrats became useless, and the middle class got shafted. London: Penguin. Perry, R., 2011. My tax and spending reform plan. [online] Available at: . [Accessed 21 November 2014]. Wood, J. C., 2004. Adam smith: critical assessments, volume 1. London: Taylor & Francis. Read More