Features of a Good Tax System

Topics: Tax, Progressive tax, Taxation Pages: 6 (2119 words) Published: June 25, 2013
QUESTION 1
Discuss the features of a good tax system and review the Malaysian income tax system in relation to those relevant features. Explain how you would bring about a better tax system, particular with reference to personal taxation, if you were given such an opportunity. Taxation means the government impose charges on the citizen and corporate entities in order to finance their expenditure. Taxation is use to encourage or discourage certain economic decision such as reduction in taxable personal income by the amount paid as interest on home mortgage loans results in greater construction activity and generates more jobs. There are five types of taxes which are direct taxes, indirect taxes, proportional or flat rate taxes, progressive taxes and regressive taxes. A direct tax is the taxes that demand from the tax payer who is responsible for paying the tax directly to the government. For example, the personal income tax, property tax, corporate tax and estate tax. On the other hand, indirect tax is the tax imposed against the tax payer but it is collected by a third party who responsible for paying the tax to the government such as sales tax, goods and services tax, fuel tax and cigarette tax. Third type of tax is proportional tax rate which also known as flat tax rate. These taxes applied at a consistent rate against a tax payer’s income regardless of their income level. Next is progressive tax. Progressive tax is the tax imposed on the individual depends on their income level. Their income tax rate will be higher as their income level increasing. Last type of taxes is the regressive tax. The regressive tax is imposing on the individual who will pay small amount or lower tax rate of their income for taxes although they are high income earners. There are eight characteristics of a good tax system. They are fairness, simplicity and compliance, stability, general deductions, general exemptions, practical, flexible and efficient. The tax system needs to be fair to the tax payers. All taxpayers need to share the tax burden equally. In other words, all high-income earners regardless individuals or corporations, they will be paying the fair share of tax. In Malaysia, the tax system exercise is according to the progressive tax rate. Tax rate in Malaysia, for individual who are resident, they will be paying their tax based on the tax rate. The tax is based on chargeable income (the total income earned minus all non-tax deductions and rebates) and has been made progressive through the imposition of a progressive tax rate structure (see Table 1.1). All resident individuals are liable to be taxed on income accrued in and derived from Malaysia or received in Malaysia from outside Malaysia1. The individual is taxed on the taxable income, which is derived after deducting the various tax deductions from the chargeable income. The taxable income is subjected to a graduated tax rate that raises from 0% to 26% with the effect from the year of assessment, 2010. Chargeable Income(RM)| Ringgit Malaysia (RM)| Rate (%)| Tax Imposed (RM)| 0 – 2,500| On the first 2,500| 0| 0|

2,501 – 5,000| Next 2,500| 1| 25|
5,001 – 10,000| On the first 5,000Next 5,000| 3| 25150| 10,001 – 20,000| On the first 10,000Next 10,000| 3| 175300| 20,001 – 35,000| On the first 20,000Next 15,000| 7| 4751,050| 35,001 – 50,000| On the first 35,000Next 15,000| 12| 1,5251,800| 50,001 – 70,000| On the first 50,000Next 20,000| 19| 3,3253,800| 70,001 – 100,000| On the first 70,000Next 30,000| 24| 7,1257,200| 100,001 – 150,000| On the first 100,00Next 50,000| 26| 14,32513,000| 150,001 – 250,000| On the first 150,000Next 100,000| 26| 27,32526,000| Exceeding 250,000| On the first 250,000On the amount exceeding 250,000| 26| 53,325………| Table 1.1: Resident Individual Tax Rates

Simplicity and compliance: The tax system should be easier to understand and embrace even by the common people. When the people can easily...
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