Business Taxation and Welfare Expenditure in the UK - Essay Example

Welfare expenditure in the UK is too minute to support services at the level to which most citizens aspire. Research findings have shown that people have been more willing to pay hefty taxes, for better services. The anathema has however been that the most politicians from main parties have lacked the political will to implement viable policies that would offer the value for their money. Higher spending champions have advocated for higher spending where position of promoting ear-marked taxes for specific, highly favoured services, as the outline budget plan of 2002 that was geared towards financing the cost of improvements in the highly valued NHS through increased National Insurance Contributions. Theoretical findings have however undermined the notion of state spending. This has been backed up by an important strand in political science that have argued a declined trust and accountability on most state institutions. On the other hand, sociology has claimed that citizens have become more individualistic, reflective and more oriented on the responsibilities for meeting their own needs. Bilodueu, M (1996) Background Considerable increases in health expenditure were inaugurated by Gordon Brown in his substantial speech in 2002. This however was implemented in the year 2003 and was spread over a period of 5 years cumulatively. Long term reviews were evaluated where increased taxes were realized to support the health domain. The implicit is that the biggest ratios of the enhanced taxes in the exchequer's receipts were responsible for the rates of NICs for employees, employers and self-employed. The rate of the NICs rose by 1% point to a rate of 11% on cumulative earnings between basic threshold and the upper earning limit. The NIC in this case was levied an increased 1% percentage point to a 12.8% earning rate above the elementary threshold. The NIC was increased by 1% to appoint of 8% on collective earnings between the lower profits limit and the upper profits limit. The income tax personal allowance was therefore to be frozen at this stage from 2002-2003. The report of the Royal Commission on the Taxation of Profits and Incomes (1955) The measures rose to 8.6 million by 2003-04; the collective increasement in employee's NICs was 3.55 billion, the total increase in employer's NIC was at 3.9 billion and the total increase in self employment NICs was at 0.45 billion. The freezing of the NICs threshold brought about 0.25billion. This was the government's decision that was hinged on supporting a holistic insurance policy that meet the rising costs of medical advances and hence offering a security measure upon the Britons in a required manner. In supporting the health sector the renewal of the shared national agreement encompassing the NHS was to be run through taxation. The way forward was through initiating of new audit systems that integrated money paid to benefits received and having also resolved after deliberation to exempt the elderly and the vulnerable. Troup, E. (1992) Introduction One on the concrete reasons for levying taxes on goods such as alcohol and tobacco is the culture that consumers hold inconsistence preferences for these goods and that it's the obligation of the government to protect the consumption of these harmful elements by deterring consumers from partaking of the same. Alcohol and tobacco pose a potential threat on the consumers and also on those who do not indulge into the usage. This grants the government the rationale to enter the market and hike the price of harmful goods that could otherwise endanger the society; this reduces the levels of demand. The harmful commodities pose a health hazard known as the merit good. From the categorical perception of equity, taking harmful goods could otherwise help in revamping health conditions, which is financed using taxed revenues. It has been agreed that excise tax levies generate colossal monetary value for the governments. The causality of taxing this goods however spark a lot of controversies since it's not clear whether this goods are taxed because consumers don't own a vocal voice that can advocate for their plight. Teja, RS and Bracewell-Milnes, B (1991) When the public activities were holistically examined the labor government finds out that there are myriad sources that would be incorporated to facilitated different expenses, though in principle one tax is not supposed to be employed in catering for specific expenses. This boils down to what is known as hypothecated taxes or some kind of a conduit that integrates this goods and taxes at the same time. The European Union proposed that the Alcohol Action plan (EAAP) had to give offer a funding alternative towards health education and research concurrently, Teja, RS and Bracewell-Milnes, B (1991). In Britain Tony Blair mooted the notion of earmarking tobacco levies as a model that treats and controls tobacco usage. The denominator, however has been that the most powerful participants have always been the most powerful; in essence accountability has suffered the worst blow. In terms of economic analysis equity and efficiency are the most fundamental elements upon which the economy is based when making evaluations to the funding of the healthcare system. Earmarking Theory Earmarking hinges on the notion of revenue sharing. It is a concept that has been around for quite along time and its recorded fiscal practices are evident. Until recently both taxpayers and politician have vetoed earmarking as a viable and feasible way by which to fund social security, road works education, environmental programs and other good goods. Politician has embraced earmarking as a conduit for curtailing taxpayer obstruction of hefty tax levies. Taxpayers on the other hand have been keen about vivid transparency in regard to how the government spends the same taxes. The evaluation of this fiscal practice has been agreed upon by contemporary economists. Deran, E. (1965), the ancient economist had a misconception of sorts about the earmarking model; this is because they were overtly concerned with the budgeting and as such disregarded the idea. They were so adamant, citing that earmarking created exorbitant and irrational budget hence it was not a feasible venture to be incorporated. They also harbored the illusion that the budgetary decision could be hijacked by benevolent dictators who rather utilize the welfare funds. The Benefit Rationale Earmarking is vibrant in the event that there exist a close margin between the benefit conduit and the levied earmarked taxes and the consequent function of the monetary value and the extra expenditures that are properly accounted, the benefits that emanate from earmarking expose to taxpayers preferences for public services sending an elaborate demand signal to the public sector. Supply is in this case adjusted to demand and economic effective is realised. This kind of earmarking exhibit equity attributes since people receive services that they pay for and vise versa. Blum, W.J & Kalven, H (1959). Efficiency In the context of the structures of government it is evident that governments have always monopilised the prices of goods and services under the pretext of mounting the effective economic infrastructures. If the health system supported by revenues from the general taxations this lead to three main questions: thus the effect of the levied taxes on the economic characteristics, the height of distortions and reallocation that will be created if the health tax has be based on the alcohol and tobacco consumers. Gravelle, J and Zimmerman, D (1994) It is imperative that the taxes do not generate exclusive impact on the tax payers. The approach, by which funds got, could be an optimal method through which optimal level funding for health could be realized. Lack of broad taxes could easily scuffle the expenditure of the health sector. The method of funding should undergo a heavy scrutiny to determine the levels of spending that should be centered towards health with a comparison to other expenditure policies. Gravelle, J and Zimmerman, D (1994) Equity Equity is a precept that poses potential difficulties in defining owing to its inherent subjectivity. Other various schools of thought content that equity is about giving the same to everybody for others, or rather giving others what they deserve. Research findings indicate however that funding of the health care by the public should based on the capacity to facilitate the same cash, while its delivery should not be based on the individual's inability to contribute. Wilkinson, M, (1994), Health care funding that is centered on the individual capacity to contribute creates an element of equity when the system of tax is progressively proportional. Proportionality would imply the payments are equal across the board towards healthcare. Progressivity implies that those with a greater pay contribute in regard to their pay and hence contribute heft taxation. Hicks, UK (1968), Objectives for taxing addictive goods [ Deadweight loss Levying taxes on goods like Alcohol and tobacco interferes with the audacity to make decision in terms of the quantities consumed and hence generating efficiency cost. The nature of the efficiency cost depends on whether the tax is passed to consumer price, and the responsiveness of the consumer to changes in prices. Wilkinson, M, (1994), With non zero demand approximation, an increase in the excise tax would lead to efficiency cost. An increase in the excise levies result into efficiency cost. An increase in price due to new and higher taxes affects the measure of the efficiency cost, income and substitution effect. The income effect that determines the impact of the reduction in real income generated by a tax, is unavoidable and is the tax s non-zero. The excess burden or deadweight loss is also visible at this time since it depends directly on the tax rate and on the responsiveness of consumers. Determining substitution impact is also relevant, since it leads consumers into re-aligning their decisions when the tax changes elative prices. Consumers would try to change and avoid taxed goods whose prices are relatively higher. This market variation generates the efficient cost. This could be termed as an excessive burden that could be avoided through imposing some taxes that don't really change the relative prices. Social costs and externalities Consumption of addictive commodities such as alcohol and tobacco potent detrimental affects that affects the consumer and also other agents; this is known as externalities. The externalities occur when on of the costs or benefits resulting from production or consumption is not considered by producers or consumers. Efficiency is achieved in ideal systems when goods that are worth than they cost are produced and goods worth less than they cost do not. Hypothecation: Hypothecation is a phrase that is employed to describe the process of assigning tax revenues to specific end by diversifying taxes to myriad sections. Earmarking of taxes may is related to a given proportion of a wider pool of revenue. In every hypothecation scenario, there is a great contrast between the accumulated funds and the funds of all government expenditure. Research has indicated that hypothecation enhances voting that empowers people to make a concrete correlation between the taxes paid and the services that the same taxes are invested upon. Sandford, C.T. (1987). Through integrated information and technology systems, transparency is enhanced; this offers taxpayers with informed decisions about the fundamentals behind funding of the public sector. This has mooted a situation where, people decide whether funding should be increased in certain regions such as health and education, and the general aspect of determining where their taxes should be channeled. Wilkinson, M, (1994), Hypothecation has been argued in deep and wide relations to health expenditure, where a number of organizations in the health filed publishing papers in the early 90s. The institute of health services management recommended taxation as an important model of funding healthcare and also by inaugurating social insurance as an alternative source in the event where political class hampered the general perception of taxation from offering a viable resource level. According to research findings commissioned by the National Economic Research Associates, people were ready to pay taxes only if their was transparency in terms of the expenditure and also if impeccable improvement was guaranteed. But since governments have not performed professionally in terms of spending money. The British Medical Association opted for hypothecation as the best venture into ensuring accountable use of the money. However, what popularized hypothecation with the public also made in unpopular with governments. Funding health services from a particular tax source was also likely to offer no services from the current system. The initial research concept by the commission indicated that the public attitudes towards taxation and the public spending was rather disconnected from where the money was being channeled and the cynicism that the government and politician portrayed made the whole process flawed. The disconnection however brought in the element of skepticism in the public support for vetoing the entire system of taxation and public services. Recommendations had to be established to connect people to their taxes and the public services. The commission there had to propose the earmarking of taxes generated from the tobacco and alcohol duties for the National Health Service. This categorical was clear about issues that were most valued. In the event that health spending rose more than the natural rise in income tax revenues, the NHS tax would be increased, at the same time other remaining taxes could be reduced, ideally this was an important element that connected people to their taxes. Wilkinson, M, (1994), Disadvantages: The treasury in the long run would become deluged with petitions, in case tax payers are not ready to meet the demands of the government policies. The government would have to average individual demands for greater spending, where individual desires for 1% on VAT for health would have to be verified if people have to make demand that related for other sector like education and policing. Troup, E. (1992) The balancing of significant preferences could easily manufacture potential disasters without arbitrary outcomes. In principle hypothecation represents a crucial shift in the democratic nature of society, considering that present and elected governments are responsible for allocating with vivid transparent expenditures and decisions to the public. Teja, RS and Bracewell-Milnes, B (1991), The job of politicians might simply be the aspect of lobbying voters on the future uses of tax revenues before the referendum. Second, many proposals for earmarked taxation might be termed tokenism, making minimal contribution to informed decision making. To be precise, the one percent extra request payed by tax payers on the basic rate of income tax to enhance health spending, may be so minimal in helping. Wilkinson, M, (1994) References: Bilodueu, M (1996) Tax earmarking and separate school financing Journal of public Economic, Vol 54, pp 51-63 Blum, W.J & Kalven, H (1959) The Uneasy Case for Progressive Taxation, University of Chicago Press Deran, E. (1965), earmarking and expenditure: a survey and a new test, National Tax Journal Gravelle, J and Zimmerman, D (1994) 'Cigarette taxes to fund health care reform', National Tax Journal, vol XLVII, pp575-590 Hicks, UK (1968), Public Finance, Cambridge University Press. Sandford, C.T. (1987), 'Death duties: taxing estates or inheritances', Fiscal Studies, Vol 8, No4, Smith, A. (1776), The Wealth of Nations, edited by E. Cannan, Methuen, 1950. Teja, RS and Bracewell-Milnes, B (1991), The Case For Earmarked Taxes: Government Spending And Public Choice, Institute Of Economic Affairs The report of the Royal Commission on the Taxation of Profits and Incomes (1955) CMND 9474, HMSO Troup, E. (1992) 'Unacceptable discretion: countering tax avoidance and preserving the rights of the individual', Fiscal Studies, Vol 13, No 4. Wilkinson, M, (1994), 'Paying for public spending: is there a role for earmarking taxes', Fiscal Studies, Vol 15, No4, pp119-135 Read More