What makes a good tax system? “The taxation in economics isdescribed as a means through, which government finances its expenditure byintroducing financial charge or other levy on citizens and corporate entities” (Anon.
, 2017). “The tax history in England datesback to the 14th, when for the first time a word “tax” appeared inEnglish language. Furthermore, an income tax was first imposed in UnitedKingdom in 1798″ (Anon., 2008). “We can distinguish between two typesof tax. Theyare as follows: Direct Tax – Payment of a tax is madedirectly to the government by the taxpayer.
Indirect Tax – Payment of a tax iscollected by intermediary from the customer. Main features 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 governmentor appointed by the government agencies. A tax payment is made for generalnational prosperity.
A tax payment is made for improvementof the whole country” (Anon., 2017). “Adam Smith – political economist andphilosopher. Well known for his book “Wealth of Nations” (1776), in which heintroduced maxims of a good taxation system.
First and foremost, according to A.Smith tax payment should be set up proportionally to how much a person benefitfrom living in community. A tax should be commensurate with level of income andsources of income such as wages, profit or rent.
Additionally, A. Smith was asupporter of taxes charged on affluent people, taxes on their luxuries. A second principal of Smith is thatthe “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 paid allow people to plan better theirbudget, which can have positive affect on their decisions in regards toinvestment. There is a danger that without clear predictable tax laws, the riskof abuse of tax system will increase. “Smith’s third principle stand that taxes should be imposed in a mannerthat facilitates a way to the maximum extent possible” (Anon., 2017).
The fourth maxim of a good tax system is decreasing deadweight loss.According to Smith (1776) exist four ways that taxes can contribute todeadweight losses. Firstly, exist the cost of hiring tax collectors to collectand process tax payment, which can have a negative impact on revenue. Lessrevenue, less finance can be invest to improve different areas.
Secondly, taxescan have an impact on industries. High tax can result in decrease ofproduction, hence decrease in revenue. Thirdly, high tax payment will encouragetax avoidance. Fourthly, paying taxes is frustrating and difficult to carryout. Nowadays, thousands of people are employed as a tax consultants,accountants or tax lawyers. Moreover, majority of working hours they arespending to fill taxes by individual taxpayers. The cost of these activitiesare definitely deadweight costs, which resulting in decrease of economicefficiency” (Smith, 1776). “According to OESD (2014) in regards to a good tax system, equity has gotsignificant impact on a tax policy framework.
Equity consist of two mainelements: horizontal and vertical equity. Horizontal equity propose that the taxpayers with similar circumstancesshould pay the same amount of tax. While vertical equity suggest that ataxpayers with a higher income should bear a higher tax payment.
Furthermore, equityis also allude to inter – nation equity. Theoretically, inter – nation equityis concerns with the accurate allocation of public increments and losses in theinternational perspective. Additionally, inter – nation equity’s objective isto make sure that each country will receive equal amount of tax payment fromforeign transactions. The tax policy main principal of inter – nation equityhas been a very important topic in recent time, considering the action ofseparating tax policy between origin and home countries” (Project, 2014).
“Furthermore, L. Deboer (1997) in his material presented to the Citizen’sCommission on Taxation he has included what criteria need to be met to create agood tax system. They are listed below: ServicesReceived or Benefits – Directlybelow any services received or any benefit standard taxes usually are createdand built on the government services or amenities which are consumed or used bythe taxpayers.
Therefore, a petrol tax charge is intended mainly forconservation of the roads. Incidence- Refers to the question: Which group oftaxpayers should incur tax -related expenses? Additionally, statuary incidence estimates tax liabilityon who should take responsibility for a tax payment. Hence, homeowners pay taxfor properties, consumers pay tax for their purchase and business bear theburden of the income tax on their profit.
Tax liability for many business isconsiderable financial burden. Therefore, some business charging its clientswith higher prices, when others offer lower pay to its employees and some ofbusinesses owners receive less profit or dividends. Moreover, one of objectives of average business is toexpand and increase its profit. Therefore, in many cases businesses are movingto different locations where their can make higher profit by paying lower taxcharges.
However, this can have anegative impact on productivity; less product are available, which is connectedto increase in price and employability; less jobs opportunities are offered. Exportability- Seems to be obvious that the best tax charge is one that is paid by someoneelse. Very often taxes set up in onejurisdiction are paid by people who are living in different place.
Broadlyspeaking that means that taxes are exported. Hence, gaming taxes in USA are mostly exported because majority of peoplewho pay them are tourists. Adequacy orRevenue Yield – 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 basegrowth – A tax revenue grow depends largely on frequency of the tax base growas well as in what way the tax rates have been structured. Suppose that only asmall number of people used tobacco product, Therefore, the tax revenue fromcigarettes increase sluggishly comparatively to the economy. Either, income tax increase hence revenuefrom income tax tend to rise, too.
This is the result of compulsion to pushtaxpayers into higher tax rate by tax authorities. Recession andExpansion – Recession causes downturn in economy, while expansion is associatedwith a growth 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, businesses are especially concern aboutproperty, income tax and individual taxes as well as public services, educationor police system. Therefore, corporations often take in to consideration listedabove factors when making investment decision. SumptuaryTaxes – In many cases government take advantage of the tax by dishearten someactivities that make up a tax base, called sumptuary tax. Taxes on tobacco or alcohol product in many cases havebeen justified because they discourage smoking and drinking, as a result savingwill increase. Hence economy growth also will increase” (DeBoer, 1997). In conclusion, it is very difficult to define a characteristic of a goodtax system.
Tax strategychoices in many cases reflects decision made by government authorities and eachof these principles will reflect greater economic and social considerationsoutside the border of tax.High rate tax for majority of peoplehave got an enormous impact on decisions they make than low rate tax.Therefore, tax system should be balanced Adam Smith’s principles of a goodtaxation system are timeless but they are not as new. Nowadays majority ofeconomists think that simpler and fairer tax system will have a positive impacton economic growth and development.