A tax system is simply the collection of taxes in an economy. It is a sum of money paid by people or businesses to a government, to be used for public purposes. Taxes are raised through various means and the systems vary for each country. The main taxes in the UK, USA and Australia will be explained. Countries use the taxes they receive in different ways. Aims and targets of most countries vary, as does the amount of tax generated. Due to this, expenditure is prioritised and spent accordingly. Government expenditure will therefore also be discussed.
The UK Tax system
In the UK taxes are collected for a variety of reasons. A wide variety of methods are used to raise the different taxes. The UK government uses taxes to manage the economy, health, education, providing public goods, influencing behaviour (e.g. tax on alcohol and petrol) and a host of other things. The modern tax system has changed since the middle ages and medieval times.
The tax year starts on the 6th April and ends on the 5th April. The tax administrator is called Her Majesty’s Revenue & Customs (HMRC). This body focuses on tax policy maintenance and delivery for both customs and revenue services. Before 2005 there were two bodies (Inland Revenue and H.M. Customs), which have now merged into HMRC.
The revenue authority has the responsibility of collecting taxes from the taxpayers. However, in some cases the self-assessment system is used. Here the taxpayer is responsible for working out their tax. This is then reported to HMRC either by paper or electronically. Company directors and self-employed people are two examples of people who fall into the self-assessment tax system.
In 1944 the PAYE (pay-as-you-earn) system was introduced. Tax is deducted from taxpayers’ wages before they receive it. This could favour the employee and the government. The taxpayer does not need to work out and send the tax themselves saving time and hassle. The government’s cash flow will be improved as they wouldn’t have to wait for the tax year to end before receiving/chasing up taxes. It may also reduce the amount of debtors and bad debts because the payment is received automatically.
The UK government receives income from various taxes. The rates and criteria for each tax differs from one another but could be related. Some of the main taxes will be discussed.
Personal Income Tax
This is a direct tax on the income of an individual. The projected revenue for the fiscal year 08/09 is ₤155billion (at 28.7% it is the highest tax revenue source). Income is not just one’s wages but includes a number of sources. Firstly, there is income from owning property, trading and employment. These fall into the ‘non-savings’ income category. The latter is usually deducted at source (PAYE). Trading income usually applies to self-employed workers. Secondly, there is ‘savings’ income which is the interest received from a bank and/or a building society. Finally ‘dividends’ from investment is an income and is also taxed. Some incomes are exempt from tax, e.g. housing and child benefit, betting winnings and scholarship grants. Personal allowances are deducted from the total income. The deductable amount in 07/08 was ₤6,035. This figure may differ for most years. Extra allowances are made for age (over 65s and 75s) and blind people. The tax rates differ for the three income types as shown in the tables below. Savings
10%* (Basic Rate)
₤0 - ₤2,320
20%* (Standard Rate)
40% (Higher Rate)
20% (Standard Rate)
₤0 - ₤34,800
40% (Higher Rate)
10% (Basic Rate)
₤0 - ₤34,800
32.5% (Higher Rate)
*Taxpayers are only eligible for this amount if their non-savings income falls below ₤2,320 (10%) and ₤34,800 (20%).
The reason for having tax bands is to ensure that the tax system is equitable, i.e. fair. People who earn more pay more than...
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