This paper examines the generally accepted desirable characteristic of a system of taxation. I describe in this paper that even where every one agrees that the tax system should be simple as dictated by the first maxim of Adam Smith, no country is yet to meet this standard. Questions on policy, complexity, equity, administrative efficiency, cost of compliance all increasing the cry for a tax change. Many Eastern Europeans have adopted the flax tax system and presently has an increase economic growth. However, are they fully operating the flax tax system?
Taxation is a levy or a charge imposed by a government on its citizens to raise revenue that finances public spending. The government of every country of the world had always imposed taxes on individuals or entities to pay for public spending. A government can also issue a public or Treasury bond to the public to finance specific project. Taxation is the most effective and important source of revenue.
The objective of taxation has changed from financing public expenditures alone to redistribution of wealth, boosting economic stability and also to discourage the behaviour and consumption of certain product. Relief are given to influence or encourage certain behaviour which in the long run will reduce overall cost of not promoting or influencing such behaviour now. For Example, First Year’s Allowance given to Corporation for buying cars that does not emit co2 and high tax paid on dangerous items such as cigarettes and alcohol.
As the needs of the public increases and become more complex, the cost of financing it increases. The different types of taxes are collected as a whole to meet the needs of the taxpayers. Individuals or entity are not taxed according to the benefit they will receive or has received from the government. However, motor fuel and road taxes are used to finance the construction and maintenance of roads has a direct benefit attached to the tax payer.
TYPE OF TAXES
There are many sources of tax revenue, e.g. Income tax, National Insurance contribution, VAT, Indirect taxes, Capital taxes, Company taxes, Council tax, taxes on Royalties, dividends, tax credit etc.
Classes of taxes
There are two classes of taxes, direct and indirect taxes.
Direct taxes are taxes on individual which is measured by income, consumption and wealth. Income tax considers the differences in the circumstance of the taxpayer. Such as the number of children, age of children, marital or family status, age of taxpayer etc. The government set an allowance in according to the taxpayer’s circumstances to ease the tax burden.
American economist Richard A Musgrave wrote” it is usually said that a direct tax is one that cannot be shifted by a taxpayer to someone else, whereas an indirect tax can be”
In United Kingdom the Income tax and the National Insurance contributions amounted to 45.3% source of revenue for the Treasury. HM Treasury, Financial Statement and budget report, 2006. Income tax is progressive tax and is responsible for income redistribution.
Indirect tax is a tax collected by a person selling good or services (middleman) from a buyer of this goods or services (customer) who bears the burden of the tax collected. The collector who is an intermediary for the government later will file in a tax return thereby will pay the government the amount collected. Some items are exempted from VAT e.g. food, rent on dwelling and rent on commercial property, health services etc. Some also has a reduced rate e.g. domestic fuel and power, energy saving material etc.
VAT is regressive tax because it does not consider the financial well being but carries equal rate on taxation on all goods and services to the high and low earners. VAT is more felt by the low earners thus shifting their purchases choice to items of necessity rather than luxury.
It is good to point out here that classifying corporate income taxes...
References: Bittker, Boris, The Brookings institution, 1980
(Treasury Press Release 13 May 2004)
Publisher Klumer Academic
BAKER and McKENZIE (1999), “Survey of the effective tax burden in the European Union”, Amsterdam, January.
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