“Thetaxation in economics is described as a means through, which governmentfinances its expenditure by introducing financial charge or other levy oncitizens and corporate entities. Tax history in England dates back to the 14th century, when for the first time the word”tax” appeared in the English language. Income tax was first imposed in theUnited Kingdom in 1798″ (Anon.
, 2008).Wecan distinguish two types of tax asfollows:Firstly,direct tax, which is paid directly to the government by the taxpayer andsecondly, indirect tax, is collected by intermediary from the customer.Themain features of taxation and their benefits include the following:Firstly,direct tax has an age limit. Next a tax payment is mandatory for individuals aswell as corporate businesses. Then tax is collected by the government orappointed by government agencies as well as tax payments are made for generalnational prosperity. Finally, tax payment is made for improvement of the wholecountry” (Anon.
, 2017).Smitha political economist and philosopher was well known for his book “Wealth ofNations” (1776), in which he introduced the maxims of a good taxation system. Firstand foremost, according to Smith tax payment should be set up proportionallyaccording to how much a person can benefit from living in a community. A taxshould be commensurate with levels of income and sources of income such aswages, profit or rent. Additionally, he was also a supporter of taxes chargedon wealthy people and on luxuries, goods and property.
The secondprincipal of Smith was that the “tax which each individual is bound to pay ought to becertain, and not arbitrary. The time of payment, the manner of payment, thequantity to be paid, ought all to be clear and plain to the contributor, and toevery other person” (Smith, 1776).Knowing the amount of tax to be paidallows a person to plan, organize and budget, which can ultimately also have apositive effect on their decisions in regards to investment. There is a dangerthat without clear predictable tax laws individuals and companies will fail asa result of poor budget allocation as well as an increased risk of abuse of thesystem.
Smith’s third principle states thattaxes should be imposed in a manner that enables easy payments for the taxpayer (Anon., 2017). In addition Smithindicates that a good tax system need to decrease deadweight loss. According toSmith there are four ways that contribute to deadweight losses. Firstly, thecost of hiring tax collectors to collect and process tax payments, which canhave a negative impact on revenue. Less revenue, less finance can be invest toimprove different areas.
Secondly, taxes can impact on industries. High tax canresult in lack of incentives and decrease of production and hence a decrease inrevenue. Thirdly, high tax payment can encourage tax avoidance by some.Finally, taxation although unavoidable can be frustrating and complicated asthousands of people are employed as a tax consultants, accountants or taxlawyers. A vast number of working hours are spent filling in tax forms. Thecost of these activities if unnecessarily complicated definitely lead to deadweightcosts, which result in decrease of economic efficiency” (Smith, 1776).According to OESD (2014) with regardsto a good tax system, equity has significant impact on a tax policy framework.Equity consist of two main elements: horizontal and vertical equity.
Horizontal equity proposes that taxpayerswith similar circumstances should pay the same amount of tax, whilst verticalequity suggest those higher income should bear a higher tax payment.Furthermore, equity also alludes to inter – nation equity. Theoretically, inter– nation equity concerns the accurate allocation of public increments andlosses in international perspective. Additionally, inter – nation equity’sobjective is to ensure that each country will receive equal amount of taxpayment from foreign transactions. The tax policy main principal of inter -nation equity has been a very important topic in recent time, considering theaction of separating tax policy between origin and home countries and with aprospect of Brexit (Project, 2014).
In “The Citizen’s Commission onTaxation”, Deboer (1997) included criteria that he believed need to be met tocreate a good workable tax system. He refers to taxes whereby the proceeds arepaid by those directly benefiting. Classic example for this are car or petroltaxes, which technically are for improving road networks. Included in this arecharges made by museums, galleries and swimming pools. Additionally, statuary incidenceestimates tax liability on who should take responsibility for a tax payment.Hence, homeowners pay tax for properties, consumers pay tax for their purchaseand business bear the burden of the income tax on their profit. Tax liabilityfor many businesses is a considerable financial burden. Therefore, somebusinesses charge its clients with higher prices, whilst others offer lower payto its employees and some of business owners ultimately earn less profit orreceive fewer dividends.
In my opinion the main objective ofaverage business is to expand and increase its profit. However, in many casesbusinesses are moving to different locations where they can achieve higherprofit by paying lower tax charges. This clearly has a major spiraling negativeimpact on whole communities and connecting businesses all around. Deboer discusses a beneficial taxcharge is one that could be paid by someone else. Very often taxes set up in one jurisdictionare paid by people who are living in different place.
Broadly speaking thatmeans that taxes are exported. Hence, taxescan be exported because people who pay them are tourists. In UK 17.
4 millionpeople on average visit London every year. This obviously impacts greatly onthe hospitality industry. Deboer discusses that one ofobjective of any government is to raise the revenue to maintenance servicesthat society demand. Revenue yield is generated by the application of a taxrate to a tax base. A tax based is in economic term an asset or activity, whichcan be tax charged like: sales, income, profit or property. Hence, the amountof tax depends on the size of a tax base. Moreover, the “power” of tax depends of the level of the tax rate, whichis set up by government authorities.
Therefore, yield will be determined byconsidering the size and growth of the tax base and on the degree of tax rates,which taxpayer are consent to receive. Deboer concurs that tax revenue growthdepends largely on frequency of the tax base growth as well as in what way thetax rates have been structured. Suppose that only a small number of people usedtobacco product. Therefore, the tax revenue from cigarettes increase sluggishlycomparatively to the economy.
Althoughsome might argue that the decreased costs of looking after people in the NHSsystem who are suffering from tobacco related illnesses is more than offset bydecrease in revenue from tobacco. He argues that recession causesdownturn in the economy, while expansion is associated with a growth ineconomy. Recession has negative impacton tax bases and hence results in a decrease in tax revenues. Some people losingjobs, therefore cannot afford to purchase items like cars or properties.
This hasa knock on effect on many businesses. The negative impact is almost never ending.On the other hand inflation causes an increase in prices as well as increase intax bases and tax revenue. At the same time wages and salaries rise, henceincome tax payment. Although some sectors may get left behind and they can nolonger afford some necessities. Furthermore, businesses are especially concernedabout property, income tax and individual taxes as well as public services, educationor police system. Therefore, corporations often take in to consideration thelisted above factors when making investment decisions. In conclusion, it is very difficultto define all the characteristics of a good tax system.
Taxstrategy choices in many cases reflect decisions made by government authoritiesand each of these principles will ultimately reflect greater economic andsocial considerations outside the border of tax. A tax system must be fair andequitable to companies and individuals. The mechanics of the taxation systemshould be clearly understood by those required to pay. Government should ensurethat taxes are fairly set so companies are given incentives to remain andexpand.
One must concur with Smith’s principles of a good taxation system whichare timeless and not innovative. In my opinion a lower tax rate would be better fornations around the world as primarily it increases incentives and promotes lesstax avoidance. This should add to the coffers of governments. Today the majority of economists agree that a simpler, fairer and well balancedtax system will have a positive impact on economic growth and development” (Mueller, 2016). DeBoer is inagreement that a good taxation system must be clear, enabling the tax payer toknow what his tax bill will be.