taxation in economics is described as a means through, which government
finances its expenditure by introducing financial charge or other levy on
citizens 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 the
United Kingdom in 1798″ (Anon., 2008).
can distinguish two types of tax as
direct tax, which is paid directly to the government by the taxpayer and
secondly, indirect tax, is collected by intermediary from the customer.
main features of taxation and their benefits include the following:
direct tax has an age limit. Next a tax payment is mandatory for individuals as
well as corporate businesses. Then tax is collected by the government or
appointed by government agencies as well as tax payments are made for general
national prosperity. Finally, tax payment is made for improvement of the whole
country” (Anon., 2017).
a political economist and philosopher was well known for his book “Wealth of
Nations” (1776), in which he introduced the maxims of a good taxation system.
and foremost, according to Smith tax payment should be set up proportionally
according to how much a person can benefit from living in a community. A tax
should be commensurate with levels of income and sources of income such as
wages, profit or rent. Additionally, he was also a supporter of taxes charged
on wealthy people and on luxuries, goods and property.
principal of Smith was that the “tax which each individual is bound to pay ought to be
certain, and not arbitrary. The time of payment, the manner of payment, the
quantity to be paid, ought all to be clear and plain to the contributor, and to
every other person” (Smith, 1776).
Knowing the amount of tax to be paid
allows a person to plan, organize and budget, which can ultimately also have a
positive effect on their decisions in regards to investment. There is a danger
that without clear predictable tax laws individuals and companies will fail as
a result of poor budget allocation as well as an increased risk of abuse of the
Smith’s third principle states that
taxes should be imposed in a manner that enables easy payments for the tax
payer (Anon., 2017). In addition Smith
indicates that a good tax system need to decrease deadweight loss. According to
Smith there are four ways that contribute to deadweight losses. Firstly, the
cost of hiring tax collectors to collect and process tax payments, which can
have a negative impact on revenue. Less revenue, less finance can be invest to
improve different areas. Secondly, taxes can impact on industries. High tax can
result in lack of incentives and decrease of production and hence a decrease in
revenue. Thirdly, high tax payment can encourage tax avoidance by some.
Finally, taxation although unavoidable can be frustrating and complicated as
thousands of people are employed as a tax consultants, accountants or tax
lawyers. A vast number of working hours are spent filling in tax forms. The
cost of these activities if unnecessarily complicated definitely lead to deadweight
costs, which result in decrease of economic efficiency” (Smith, 1776).
According to OESD (2014) with regards
to 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 taxpayers
with similar circumstances should pay the same amount of tax, whilst vertical
equity 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 and
losses in international perspective. Additionally, inter – nation equity’s
objective is to ensure that each country will receive equal amount of tax
payment from foreign transactions. The tax policy main principal of inter –
nation equity has been a very important topic in recent time, considering the
action of separating tax policy between origin and home countries and with a
prospect of Brexit (Project, 2014).
In “The Citizen’s Commission on
Taxation”, Deboer (1997) included criteria that he believed need to be met to
create a good workable tax system. He refers to taxes whereby the proceeds are
paid by those directly benefiting. Classic example for this are car or petrol
taxes, which technically are for improving road networks. Included in this are
charges made by museums, galleries and swimming pools.
Additionally, statuary incidence
estimates tax liability on who should take responsibility for a tax payment.
Hence, homeowners pay tax for properties, consumers pay tax for their purchase
and business bear the burden of the income tax on their profit. Tax liability
for many businesses is a considerable financial burden. Therefore, some
businesses charge its clients with higher prices, whilst others offer lower pay
to its employees and some of business owners ultimately earn less profit or
receive fewer dividends.
In my opinion the main objective of
average business is to expand and increase its profit. However, in many cases
businesses are moving to different locations where they can achieve higher
profit by paying lower tax charges. This clearly has a major spiraling negative
impact on whole communities and connecting businesses all around.
Deboer discusses a beneficial tax
charge is one that could be paid by someone else. Very often taxes set up in one jurisdiction
are paid by people who are living in different place. Broadly speaking that
means that taxes are exported. Hence, taxes
can be exported because people who pay them are tourists. In UK 17.4 million
people on average visit London every year. This obviously impacts greatly on
the hospitality industry.
Deboer discusses that one of
objective of any government is to raise the revenue to maintenance services
that society demand. Revenue yield is generated by the application of a tax
rate to a tax base. A tax based is in economic term an asset or activity, which
can be tax charged like: sales, income, profit or property. Hence, the amount
of tax depends on the size of a tax base.
Moreover, the “power” of tax depends of the level of the tax rate, which
is set up by government authorities. Therefore, yield will be determined by
considering 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 growth
depends largely on frequency of the tax base growth as well as in what way the
tax rates have been structured. Suppose that only a small number of people used
tobacco product. Therefore, the tax revenue from cigarettes increase sluggishly
comparatively to the economy. Although
some might argue that the decreased costs of looking after people in the NHS
system who are suffering from tobacco related illnesses is more than offset by
decrease in revenue from tobacco.
He argues that recession causes
downturn in the economy, while expansion is associated with a growth in
economy. Recession has negative impact
on tax bases and hence results in a decrease in tax revenues. Some people losing
jobs, therefore cannot afford to purchase items like cars or properties. This has
a 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 in
tax bases and tax revenue. At the same time wages and salaries rise, hence
income tax payment. Although some sectors may get left behind and they can no
longer afford some necessities. Furthermore, businesses are especially concerned
about property, income tax and individual taxes as well as public services, education
or police system. Therefore, corporations often take in to consideration the
listed above factors when making investment decisions.
In conclusion, it is very difficult
to define all the characteristics of a good tax system. Tax
strategy choices in many cases reflect decisions made by government authorities
and each of these principles will ultimately reflect greater economic and
social considerations outside the border of tax. A tax system must be fair and
equitable to companies and individuals. The mechanics of the taxation system
should be clearly understood by those required to pay. Government should ensure
that taxes are fairly set so companies are given incentives to remain and
expand. One must concur with Smith’s principles of a good taxation system which
are timeless and not innovative. In my opinion a lower tax rate would be better for
nations around the world as primarily it increases incentives and promotes less
tax avoidance. This should add to the coffers of governments. Today the majority of economists agree that a simpler, fairer and well balanced
tax system will have a positive impact on economic growth and development” (Mueller, 2016). DeBoer is in
agreement that a good taxation system must be clear, enabling the tax payer to
know what his tax bill will be.