What makes a good tax system? “Thetaxation in economics is described as a means through, which governmentfinances its expenditure by introducing financial charge or other levy oncitizens and corporate entities” (Anon.
, 2017). “Thetax history in England dates back to the 14th, when for the firsttime a word “tax” appeared in English language. Furthermore, an income tax wasfirst imposed in United Kingdom in 1798″ (Anon., 2008). “Wecan distinguish between two types of tax.
They are as follows: Direct Tax – Payment of a tax is madedirectly to the government by the taxpayer.Indirect Tax – Payment of a tax is collectedby intermediary from the customer. Mainfeatures of the tax are: The direct tax has to have age limit.A tax payment is obligatory for anindividuals as well as corporate businesses.A tax is collected by the government orappointed by the government agencies. A tax payment is made for general nationalprosperity.A tax payment is made for improvement of thewhole country” (Anon., 2017).
“AdamSmith – political economist and philosopher. Well known for his book “Wealth ofNations” (1776), in which he introduced maxims of a good taxation system. Firstand foremost, according to A. Smith tax payment should be set up proportionallyto how much a person benefit from living in community.
A tax should becommensurate with level of income and sources of income such as wages, profitor rent. Additionally, A. Smith was a supporter of taxes charged on affluentpeople, taxes on their luxuries. Asecond principal of Smith is that the “tax which each individual is bound to pay ought tobe certain, 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.” Knowing the amount of tax to be paidallow people to plan better their budget, which can have positive affect ontheir decisions in regards to investment. There is a danger that without clearpredictable tax laws, the risk of abuse of tax system will increase. “Smith’s third principle stand thattaxes should be imposed in a manner that facilitates a way to the maximumextent possible” (Anon.
, 2017). The fourth maxim of a good taxsystem is decreasing deadweight loss. According to Smith (1776) exist four waysthat taxes can contribute to deadweight losses. Firstly, exist the cost ofhiring tax collectors to collect and process tax payment, which can have anegative impact on revenue. Less revenue, less finance can be invest to improvedifferent areas. Secondly, taxes can have an impact on industries.
High tax canresult in decrease of production, hence decrease in revenue. Thirdly, high taxpayment will encourage tax avoidance. Fourthly, paying taxes is frustrating anddifficult to carry out. Nowadays, thousands of people are employed as a taxconsultants, accountants or tax lawyers. Moreover, majority of working hoursthey are spending to fill taxes by individual taxpayers. The cost of theseactivities are definitely deadweight costs, which resulting in decrease ofeconomic efficiency” (Smith, 1776). “According to OESD (2014) in regardsto a good tax system, equity has got significant impact on a tax policyframework.
Equity consist of two main elements: horizontal and vertical equity. Horizontal equity propose that thetaxpayers with similar circumstances should pay the same amount of tax. Whilevertical equity suggest that a taxpayers with a higher income should bear ahigher tax payment. Furthermore, equity is also allude to inter – nationequity. Theoretically, inter – nation equity is concerns with the accurateallocation of public increments and losses in the international perspective.Additionally, inter – nation equity’s objective is to make sure that eachcountry will receive equal amount of tax payment from foreign transactions. Thetax policy main principal of inter – nation equity has been a very importanttopic in recent time, considering the action of separating tax policy betweenorigin and home countries” (Project, 2014).
“Furthermore, L. Deboer (1997) inhis material presented to the Citizen’s Commission on Taxation he has includedwhat criteria need to be met to create a good tax system. They are listedbelow: Services Received orBenefits – Directly below any services received or any benefitstandard taxes usually are created and built on the government services oramenities which are consumed or used by the taxpayers. Therefore, a petrol taxcharge is intended mainly for conservation of the roads.
Incidence- Refers to the question: Which group oftaxpayers should incur tax -related expenses? Additionally, statuaryincidence estimates tax liability on who should take responsibility for a taxpayment. Hence, homeowners pay tax for properties, consumers pay tax for theirpurchase and business bear the burden of the income tax on their profit. Taxliability for many business is considerable financial burden. Therefore, somebusiness charging its clients with higher prices, when others offer lower payto its employees and some of businesses owners receive less profit ordividends. Moreover, one ofobjectives of average business is to expand and increase its profit.
Therefore,in many cases businesses are moving to different locations where their can makehigher profit by paying lower tax charges. However, this can have a negative impact on productivity; less productare available, which is connected to increase in price and employability; lessjobs opportunities are offered. Exportability – Seems tobe obvious that the best tax charge is one that is 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,gaming taxes in USA are mostly exported because majority of people who pay themare tourists. Adequacy or RevenueYield – One of objective of any government is to raise the revenue tomaintenance services that society demand. Revenue yield is generated by theapplication of a tax rate to a tax base.
A tax based is in economic term anasset or activity, which can be tax charged like: sales, income, profit orproperty. Hence, amount of tax depends on the size of a tax base. Moreover, the “power” of tax depends of thelevel 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 andon the degree of tax rates, which taxpayer are consent to receive. Tax base growth – A taxrevenue grow depends largely on frequency of the tax base grow as well as inwhat way the tax rates have been structured. Suppose that only a small numberof people used tobacco product, Therefore, the tax revenue from cigarettes increasesluggishly comparatively to the economy. Either, income tax increase hence revenue from income tax tend to rise,too.
This is the result of compulsion to push taxpayers into higher tax rate bytax authorities. Recession and Expansion- Recession causes downturn in economy, while expansion is associated with agrowth in economy. Recession hasnegative impact on tax bases and hence resulted in decrease in tax revenues.Some people losing their jobs, therefore they cannot effort to purchase itemslike cars or properties. Inflation – Inflationcauses an increase in prices as well as increase in tax bases and tax revenue. Atthe same wages and salaries rise, hence income tax payment. Economic Competitiveness – The economy largelyhas an effect on tax system but on the other hand tax can influence theeconomy. The tax system can affect business activities.
Businesses looking forincreasing its profitability, therefore locate its headquarters in places wheretax liabilities are lower. This can result in avoidance to pay tax liability. Furthermore, businessesare especially concern about property, income tax and individual taxes as wellas public services, education or police system. Therefore, corporations oftentake in to consideration listed above factors when making investment decision. Sumptuary Taxes – Inmany cases government take advantage of the tax by dishearten some activitiesthat make up a tax base, called sumptuary tax. Taxes on tobacco oralcohol product in many cases have been justified because they discouragesmoking and drinking, as a result saving will increase. Hence economy growthalso will increase.
” (DeBoer, 1997). In conclusion, it is very difficultto define a characteristic of a good tax system. Tax strategy choicesin many cases reflects decision made by government authorities and each ofthese principles will reflect greater economic and social considerationsoutside the border of tax..
The lower tax rate the better fornations around the world”Adam Smith’s principles of a goodtaxation system are timeless and not as new. Nowadays majority of economiststhink that simpler and fairer and well balanced tax system will have a positiveimpact on economic growth and development” (Mueller, 2016).