Tax collection is very important for any country as through this collection the economy of the country grows, and tax is levied on individuals or organisations for buying and selling of goods and services.(Miller and Rose ) But as many people are not happy with [paying taxes to the government but still they are very important for the growing economy as these contributions are used to build many new projects in the country like for example school for education, construction of roads,hospitals,wages of government employee and government servants including others. This is very much justified to impose tax on the public and organisations for the welfare of the economy(De Groot 2006)
Classification of tax can be done in two broad categories one is direct tax and the other one is indirect taxes both taxes can be either in cash or through electronic way. According to Meade(2013) difference is that direct taxes is paid directly by the person who is liable to pay like income tax, property tax, corporation tax .The other is indirect taxes like vat, service tax ,sales tax which is not directly paid .collection of tax play a very important role as according to survey 25 to 45 percentage of national income is collected through tax, Many countries manage their deficit issues by generating more revenue through collection of tax from public which is very important to meet the current economy scenario(Vogel 2014)
However about current tax scenario every individual should have clear and proper understanding of the tax principles and system of it .A clear understanding and a clear picture gives a proper information of the tax system in the country which helps the tax payers to easily co link the tax to be paid to the government.(Mirrlees 2011)
Indirect taxes are taxes paid by the tax payer when goods are purchased from the seller and as a part of the goods value it is paid directly to the seller of the goods as an expenditure towards the product and then it the seller responsibility to pass on the taxation part to the government. Indirect taxes generally include value added tax, postage duty tax, custom duties and excise duty levied on tobacco products, alcohol and other products.
The concept of value added tax has received more attention in recent time. As at the time when European Union formed and consist of ten states most of the European Union members used value added tax as the tax policy rather than other tax system. Comparison to old European Union members(McCormick 2017) they have higher rate of tax compare to new European Union members states. This difference in tax structure has increased competition between old European Union member state and new European member state.(McCormick 2017)
According to Schenk(2015).The value added tax came into effect on 1st January 1973 in UK.This is tax charged on sales value of the goods. This tax has become an important source of government revenue and increasing the treasury of the government fund and it comprise of total of 16 percent of total taxes collected.
The value added tax is such a tax which cannot be avoided and it has to be paid, though the nation UK has exempted many items which are out of scope of VAT as comparison to other nation, as UK AND Ireland are the main nation in the European union in which zero rate tax prevail for most of the goods like books and clothes to children. In few European nations there are products in which standard rate of tax is applicable to few extreme products. The expense on which the vat is applicable is very high.
According to Keen(2008)The value added tax can be considered as an income as it is a type of final tax levied on final product and depending upon the nature of the product prices can vary. The most important fact is that value added tax can be levied on input part only which ensures that the small and Medium Enterprises are not taxed. People believe that the main advantage of value added tax is to increase revenue but the main purpose is to bring fairness, efficiency and transparency which are relevant for discussion. Some believe it is a very good tax as it is does not affect the incentives to work, some argue it is a bad way of generating tax as the main burden to borne the tax shifted to poor people who are not in a position to pay rather than on rich people, in reality both the views are not correct regarding the value added tax.
Direct taxes are taxes which are paid directly by the individual or organisations in his or capacity to the authorities of tax. According to Mirrlees (2012)The main source of income generation of tax authorities through direct tax are income tax, capital gain tax, corporation tax and inheritance tax. Companies pay the most important direct tax i.e. the corporation tax. These taxes rates are looked after by HM Revenue and custom department which was formed in the year 2005, April through the merger of Customs and Excise and the Inland Revenue and National Insurance Premium, they both are managed by National Insurance Contribution Authority of HMRC.
The income tax slab is made in a progressive pattern slab, that is if you receive a higher salary than you come under a higher tax bracket and a higher rate of tax will be payable by you. This idea of progressive pattern of slab is supported by many great ideologists and scientists. Generally in almost all nations income tax is applied in a progressive style and this is accepted with utmost heart and not with any criticism.
Income on which direct taxes applicable are salary income, self employed income, bank interest, pension income, companies engaged in construction, business which are non registered and dividend etc.Income generated as profit from social service are not considered as income and subject to income tax. Government also allow few income to be non taxable in the hands of receiver like state pension but government has not set up any benefit or allowances for people with disability. Any donation given to relief fund or registered charity can be deducted from the total income for reduction in tax. Individual is not liable to pay income tax on certain income such as income from saving certificate,kmk certificate, saving investment product and individual saving account. Pension contribution by employer and employee and social security contributions are not allowed as deduction from employee salary for taxation purpose.(MacDonald and Osberg 2014)
According to Adam smith taxes should be taxed in such a way and accordingly in a way the citizen derives benefit from the state and the taxing system should be appropriate, fairer and effective.
The tax should be proportioned in such a way the person derives benefit from living in the society. The proportion of income should be very much fair whether it is a rent, wages, income or profit. Adam also pointed out that how few taxes like luxury tax fall dis proportionately only on the rich people but is not bad too, but the main principle which smith focussed on is proportionately. Every state needs to contribute towards the government according to the earning capacity and profit and the protection and benefit derived from the state in proportion to their ability and benefit derived from the state.
Smith compared the tax system to the joint owners of an estate ,who are obliged to contribute on the basis of the respective interest derived from the estate. So taxpayers are also like shareholders whose shareholding is more in a venture contributes more and whose shareholding is less they contribute accordingly, this is similar to Nozicks theory of a private state.
Adam smith second point is that the tax which is required to paid by everyone in the nation should be certain and clear enough .The time of payment, manner and quantity of amount to be paid should be clear to the tax payer and every other person .Knowing taxes to be paid by the tax payer makes to create better plans for future investment and also encourage them to invest in a plan which gives them maximum benefit and are tax free for them which leads to productivity. The predictability theme is discussed with must broader view by Hayek in many places but with utmost clarity in the constitution of Liberty.
If the tax laws are not clear than the tax collectors can collect extra tax from the public. The labyrinthian tax code and recent abuses by the IRS show the truth and prescience of Smith’s maxims. With complex tax rules and laws, person subject to tax can be put in trouble in the hands of tax gatherer who can extort tax and money from the person.
Adam third point is that tax to be paid by the person should be easy and convenient, that means the taxes which are to be borne by the tax payer should be very easy and simple for them to pay and the contributor can pay it in a very effective manner. Smith also pointed out that how the government can tax more to people than they actually realize.
Adam smith another point about the good tax policy is reducing deadweight loss “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. Smith uses “take out” refer to money taken from public and “keep out “refer to income which is unrealized due to burden of tax, distortions .Smith describes there are four ways deadweight loss can be created .Firstly, the government hire collector to collect tax from the public the more they hire the less revenue come into government treasury and less it will have to spend in other construction projects. Secondly industry is also discouraged through the taxation system as higher tax will create less production and demand among the public and less revenue to the authority. Thirdly higher rate of tax will force people to evade tax and will create black money. Fourthly paying taxes for the citizen is burdensome and very difficult, this can be considered as the biggest deadweight loss for the nation as millions of people as engaged in the profession of tax consultants and lawyers and spend thousands of hours in filing tax return every year, so this cost is a clearly deadweight loss for the nation and reduces productivity.
Adam smith point of taxation are not so unique today as it was before when he first wrote them. Most people and ideologist believe that simple and fair tax will promote growth of the economy. But due to complex tax system and arbitrariness of our tax structure ,it cannot be denied that we known about good code of taxation rules and laws for many years.
This is generally an argument as comparing income tax to consumption is very difficult as all does not consume at a same flat rate. As people who falls under low income group and have low income are strongly affected by some luxury items such as car .In order to claim the benefit people always need to keep the receipt copy of the taxes paid in order to claim the benefit in the tax return for the taxes already paid and this process continues of keeping the receipt of taxes paid year to year basis .Comparing the same with income tax it is not so rigid like consumption tax rather it is more flexible as it allows the person to file the tax return at the end of the year and claim benefit of whatever social service expenses and other expenses has been done in a year.
Ideologists and economists claim that income tax is lower than consumption tax due to time factor but this is not possible practically as it is considered neutral only if the consumption pattern does not change or does not affect natural resources. The expenditure is done only on consumption part of tax, the product or service which has been used is not anymore relevant interims of allocation of resources. A consumption tax which is more organised is more neutral as comparison to other and it does not affect the fund distribution in comparison to income tax. Taxes what generally we pay is taxed on income of the people, services provided to others and on goods and there is no tax to be borne by people on the saving of the person .The saving of the person is not taxed this encourage people to save more and invest there surplus money on government bonds and debentures and create habit of saving and increase the standard of living of people and the saving of people also help them to survive to the unforeseen risk in future. Saving habit also increases the capital of the people and also helps in development of growth of the economy.
Income tax is also an argument for lower class of people and middle classes that it is a constraint for them and on their decision regarding the financial decision. Poor families and lower class families who generally depend on their monthly income for survival and any small deduction in income can have a big impact on their living standard as the smallest income deduction also means a lot to the low level families, while the income deduction of high class families who generally save most of their income matters very less and does not affect their standard of living and lifestyle. It is also beloved that income tax is a violation to the citizenship. As Libertarians further argued that levy of income tax restrict the right of individual to decide where to spend the money and how to use it further .It is also been criticised that progressive rate of tax is very much unfair for the rich as they are taxed at a very higher rate comparison to poor people and it is advantageous for them and favours them calling it a huge success.(Mellville2017)
The layout of the tax is dependant not only on the part of equity and efficiency but also on other cost of enforcement .In this whole write-up we have talk about the income tax and consumption tax and compared the same and payment of both taxes ,like payment of income tax that has the chances of declaration of income low than actual in order to evade tax and create black money thus creating a blockage in the growth of economy and the other is consumption tax levied on products ,the customer in order to avoid the consumption tax can buy the product from the black market were consumption tax is not levied and thus getting the product at a cheap and low price creating a tax evasion.
References:
De Groot, R., 2006. Function-analysis and valuation as a tool to assess land use conflicts in planning for sustainable, multi-functional landscapes. Landscape and urban planning, 75(3-4), pp.175-186.
Johnson, P., 2014. Tax without design: recent developments in UK tax policy. Fiscal Studies, 35(3), pp.243-273.
Mankiw, N.G., Weinzierl, M. and Yagan, D., 2009. Optimal taxation in theory and practice. Journal of Economic Perspectives, 23(4), pp.147-74.
Meade, J.E., 2013. The Structure and Reform of Direct Taxation (Routledge Revivals). Routledge.
Keen, M., 2008. VAT, tariffs, and withholding: Border taxes and informality in developing countries. Journal of Public Economics, 92(10-11), pp.1892-1906.
McKinnon, R.I., 2010. Money and capital in economic development. Brookings Institution Press.
McCormick, J., 2017. Understanding the European Union: a concise introduction. Palgrave.
Miller, P. and Rose, N., 2017. Political power beyond the state: Problematics of government. In Foucault and Law (pp. 191-224). Routledge.
Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G. and Poterba, J., 2011. The Mirrlees review: Conclusions and recommendations for reform. Fiscal Studies, 32(3), pp.331-359.
Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G. and Poterba, J., 2012. The Mirrlees review: a proposal for systematic tax reform. National Tax Journal, 65(3), p.655.
Schenk, A., Thuronyi, V. and Cui, W., 2015. Value added tax. Cambridge University Press.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Melville, A. 2017, Taxation, Pearson Education Limited.
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