What makes a good tax system?
“The 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” (Anon., 2017).
“The tax history in England dates
back to the 14th, when for the first time a word “tax” appeared in
English language. Furthermore, an income tax was first imposed in United
Kingdom in 1798″ (Anon., 2008).
“We can distinguish between two types
of tax. They
are as follows:
Direct Tax – Payment of a tax is made
directly to the government by the taxpayer.Indirect Tax – Payment of a tax is
collected 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 an
individuals as well as corporate businesses.A tax is collected by the government
or appointed by the government agencies. A tax payment is made for general
national prosperity.A tax payment is made for improvement
of the whole country” (Anon., 2017).
“Adam Smith – political economist and
philosopher. Well known for his book “Wealth of Nations” (1776), in which he
introduced 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 benefit
from living in community. A tax should be commensurate with level of income and
sources of income such as wages, profit or rent. Additionally, A. Smith was a
supporter of taxes charged on affluent people, taxes on their luxuries.
A second principal of Smith is 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.”
Knowing the amount of tax to be paid allow people to plan better their
budget, which can have positive affect on their decisions in regards to
investment. There is a danger that without clear predictable tax laws, the risk
of abuse of tax system will increase.
“Smith’s third principle stand that taxes should be imposed in a manner
that 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 to
deadweight losses. Firstly, exist the cost of hiring tax collectors to collect
and process tax payment, which can have a negative impact on revenue. Less
revenue, less finance can be invest to improve different areas. Secondly, taxes
can have an impact on industries. High tax can result in decrease of
production, hence decrease in revenue. Thirdly, high tax payment will encourage
tax avoidance. Fourthly, paying taxes is frustrating and difficult to carry
out. Nowadays, thousands of people are employed as a tax consultants,
accountants or tax lawyers. Moreover, majority of working hours they are
spending to fill taxes by individual taxpayers. The cost of these activities
are definitely deadweight costs, which resulting in decrease of economic
efficiency” (Smith, 1776).
“According to OESD (2014) in regards to a good tax system, equity has got
significant impact on a tax policy framework. Equity consist of two main
elements: horizontal and vertical equity.
Horizontal equity propose that the taxpayers with similar circumstances
should pay the same amount of tax. While vertical equity suggest that a
taxpayers with a higher income should bear a higher tax payment. Furthermore, equity
is also allude to inter – nation equity. Theoretically, inter – nation equity
is concerns with the accurate allocation of public increments and losses in the
international perspective. Additionally, inter – nation equity’s objective is
to make sure 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” (Project, 2014).
“Furthermore, L. Deboer (1997) in his material presented to the Citizen’s
Commission on Taxation he has included what criteria need to be met to create a
good tax system. They are listed below:
Received or Benefits – Directly
below any services received or any benefit standard taxes usually are created
and built on the government services or amenities which are consumed or used by
the taxpayers. Therefore, a petrol tax charge is intended mainly for
conservation of the roads.
– Refers to the question: Which group of
taxpayers should incur tax -related expenses? 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 business is
considerable financial burden. Therefore, some business charging its clients
with higher prices, when others offer lower pay to its employees and some of
businesses owners receive less profit or dividends. Moreover, one of objectives of average business is to
expand and increase its profit. Therefore, in many cases businesses are moving
to different locations where their can make higher profit by paying lower tax
charges. However, this can have a
negative impact on productivity; less product are available, which is connected
to 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 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, gaming taxes in USA are mostly exported because majority of people
who pay them are tourists. Adequacy or
Revenue Yield – 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, 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. Tax base
growth – A tax revenue grow depends largely on frequency of the tax base grow
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. 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 by tax authorities. Recession and
Expansion – Recession causes downturn in economy, while expansion is associated
with a growth in economy. Recession has
negative impact on tax bases and hence resulted in decrease in tax revenues.
Some people losing their jobs, therefore they cannot effort to purchase items
like cars or properties. Inflation – Inflation
causes an increase in prices as well as increase in tax bases and tax revenue. At
the same wages and salaries rise, hence income tax payment. Economic Competitiveness – The economy largely
has an effect on tax system but on the other hand tax can influence the
economy. The tax system can affect business activities. Businesses looking for
increasing its profitability, therefore locate its headquarters in places where
tax liabilities are lower. This can result in avoidance to pay tax liability. Furthermore, businesses are especially concern about
property, income tax and individual taxes as well as public services, education
or police system. Therefore, corporations often take in to consideration listed
above factors when making investment decision. Sumptuary
Taxes – In many cases government take advantage of the tax by dishearten some
activities that make up a tax base, called sumptuary tax. Taxes on tobacco or alcohol product in many cases have
been justified because they discourage smoking and drinking, as a result saving
will increase. Hence economy growth also will increase” (DeBoer, 1997).
In conclusion, it is very difficult to define a characteristic of a good
tax system. Tax strategy
choices in many cases reflects decision made by government authorities and each
of these principles will reflect greater economic and social considerations
outside the border of tax.
High rate tax for majority of people
have got an enormous impact on decisions they make than low rate tax.
Therefore, tax system should be balanced
Adam Smith’s principles of a good
taxation system are timeless but they are not as new. Nowadays majority of
economists think that simpler and fairer tax system will have a positive impact
on economic growth and development.