According to Longman dictionary of contemporary English tax is an amount of money that you must pay to the government according to your income, property, goods etc and that is used to pay for public services. Traditionally, in the pre-capitalist states taxes were paid in kind and labour, but in modern systems taxes are levied in money. Throughout history taxes have been used to carry out functions of the states and their functional equivalents. These states functions include the enforcement of the law and order, property protection, infrastructure and for the day to day operations of the state itself.
Also governments use funds obtained through taxes to fund for public services and welfare. Education and healthcare systems, pension funds for old people, water energy and the like are some of the services funded by the government. Different kinds of taxes and variety of tax rates are used so as to redistribute resources and reduce the burden to the taxpayers which includes business and individual persons or classes of the population (Lerner, 1951).
The tax system of a nation is a reflection of the communal values of its people or its leaders. During the creation of the nations’ tax system consideration must be put on the tax burden distribution, as to whom, how much and for what purpose will the taxes be spent. In most democratic states the tax system will definitely reflect the communal values of the masses but in those states where the citizens don’t have any kind of influence in the tax system then definitely the system will reflect the values of those in power as in the agrarian age where the tax system supported the nobles more than it did the poor as stated by McCluskey (2005).
In this essay I intend to address the fairness of taxation and how it has changed through its evolution since the Adam Smiths time to the present time. Also I intend to elaborate the extent of fairness of taxation in regards to the modern day tax system. With this, I will argue along the lines of the measures proposed to the House of Commons by Rt Hon Alistair Darling MP, the chancellor of exchequer in the Pre- Budget report of December 2009.
Changes in the meaning and importance of Taxation
As I have stated above tax is a payment or levy which is currently in form of money imposed on individuals or businesses by the state for the purpose of funding different state functions. The importances of taxes are paramount as per its purposes. There is a need for the state to protect peoples’ property and provide public services such as education and healthcare. Thus the needs to pay taxes are there and cannot be ignored. The problem is in the methods of tax collection and how the governments spend the funds raised from the taxes collected. In politics and economics this has been the major source of controversy.
Adam Smith in his book Wealth of Nations he outlined four principles of an ideal tax system which are equity, certainty, convenience and economy. These principles are still fundamental and very relevant in the modern environment. They are of paramount importance especially when a tax policy is created. This is because no tax system will be effective in its implementation and satisfactory in meeting its objectives if these principles are not upheld.
In the modern environment globalization of business activity is very speedy, so is the mobility of capital. Without forgetting the blurring of jurisdictional limitations, the domestic settings of tax systems have taken on an international application. Having said this, it seems that today’s application of the principles with a common interpretations have become of paramount importance. The impact of the purpose of taxation on the principles has taken a significant turn especially on the application side of it in the recent past.
The fact that the redistribution of income is socially acceptable means that breaches of design principles or rewriting their content to take account of socially acceptable exceptions is equally acceptable. The tax system can be designed to achieve broad social objectives. Massere (1993) argued that a taxation system can achieve a form of redistribution of income from the wealthy to the poor. This helps to achieve social policy where individuals never fall below a level of income that would deprive them of access to basic food, clothing, housing and education, he continues. But in today’s complex environment with a vast number of different needs have changed the whole concept of equity in taxation.
Big corporations and wealthy states influence the domestic settings of the tax systems of poor nations. Individuals have been sidelined in the development of international tax rules and the complexity and influence of the global economy today have made it difficult for emerging economies to observe fairness in their tax systems. Poor nations have been so absorbed into encouraging foreign direct investments from corporate entities and states to the extent failing to observe the fundamental issues concerning their taxation systems. Because encouraging direct investment and the free movement of capital without the distortion of taxation is thereby more difficult to be achieved in the modern environment than during the Adam Smiths era, the changes and importance of the tax systems today are more seen in the developing world and third world countries.
The extent of fairness and the modern day tax systems
Based on taxation neutrality, all net increases to wealth should be taxed; this means that there should be a uniform treatment across the tax base and comprehensive application of taxation. The fairness of tax systems evolve in this concept as stated by Olmert (1996). People should pay taxes but also should be allowed to retain a significant amount for their own personal use and development. It is not at all fair to have a tax system which takes money from individuals to an extent that they feel the pinch, especially when meeting their daily needs. With the idea that tax meets the expenses of the government which are both current and capital it is just sound to have the current generation invest more on the current expenses. This however does not mean that the capital investments should be left alone but since these are “generational gifts” a fair way should be utilized to balance expenses of the current and future generation and at the same time examine the input of the past generation. This however is my opinion and a trace of this can be found within the current framework of ensuring our tax system achieves equity but I need say that a lot more need be done. Having said this, hereafter are some of the measures proposed by Rt Hon Alistair Darling MP, the chancellor of exchequer in the Pre- Budget report of December 2009 which will guide us in the following discussion on the extent of fairness and the modern day tax system.
- Cut VAT to 15 per cent for a year to put over £11bn into the pockets of consumers and retailers.
- Defer tax rises and extended tax allowances for businesses.
- Temporary increase of the threshold for empty property relief to help small businesses with a rateable value below £18,000 will be exempt from business rates.
- Defer for smaller companies the raise in corporation tax.
- Freeze stamp duty so as to help home buyers and home.
- Ease the procedures for those over 65 to get Working Tax Credit.
- Cut down bingo duty by 2 per cent.
- Provide financial support for up to 10,000 undergraduates from low-income backgrounds to take up short internships in industry, business and the professions.
- Introduce a special one-off levy of 50 per cent on any individual discretionary bonus above £25,000.
- Reduce pension tax relief for people with incomes over £150,000.
- Stop the point at which people start paying income tax at forty per cent per annum.
(source; Pre-Budget Report statement to the House of Commons, delivered by the Rt Hon Alistair Darling MP, Chancellor of the Exchequer: 09 December 20)
In my opinion taxes are never fair. They are important but never fair especially the modern day tax systems. Considering the measures proposed by Mr. Alistair above, in his Pre-Budget Report which in my opinion sets out to deliver additional revenues, and protect £5bn a year of existing revenues which in his words are” tough, but necessary” measures to increase tax (Melville 2009). Of the additional revenue raised, more than a half will be paid by the “top 2 per cent of earners”. But the question is the other 98 percent which will have to shoulder the other half of the raised revenue; will they have received a fair treatment? I guess not.
He continues to say that he has done it in a fair way and those on modest incomes are protected. He said that the burden on the middle income earners will depend on their earnings. The biggest burden will fall on those with the highest incomes”. To me these statements seem to try shielding the guilt rather than defending the “right” in his decisions. All those measures proposed above do not have any trace of fairness to the common masses as most of them only provide a longer time span for paying them or lure them into deeper into debt (Parking, 2006).
Any government thrives on taxes, there fore every measure which will be taken by the government such as the provision of financial support or the cutting of bingo duty by 2 percent will always be recovered by something else. The issue is the working majority who most of them depend on a pay check and those Small Business Owners are the ones suffering the most from these tax proposals (Melville, 2009) . Those big corporations are never caught in the “rat race” as Robert Kiyosaki put it as they have a lot of loopholes with which to shield their income and increase their cash flows.
Let’s consider this example, as the global financial crisis hit still some banks are insisting in paying even more bonuses to its already highly paid staff. In order to rein back bonuses on the part of banks is just an assumption on the part of the government. Yet Mr. Alistair says that, “the loss of £80 billion incurred by the banks in UK would have been much higher without the unprecedented level of support from the taxpayer”. Yet these banks which still place their top priority in bonus payments will not suffer from the “windfall of taxes” only their employees “as usual”.
In the introduction I explained the meaning of tax and its importance followed by the changes in the fairness of the tax systems since the Adam Smith’s era to the present day. Today, the information age has brought so many changes in the financial sector such that people are failing to understand how they can be financially secure on a long term basis. During the industrial age the financial well fare of the individual was taken care by the government of the company he/she is working for.
But the rules have changed since the information age came to be. Today the financial welfare of any individual will have to be catered by the individual him/herself as the pension plans today are not sufficient to rely on because one can outlive his pension savings due to the fast deterioration of the purchasing power of currency and inflation among other factors. Today people need to be concerned with more than just job security because taxes trap employees easily than they trap employers.
In my opinion taxes have never been fair because in order to raise taxes in a fair fashion one has to figure out who really pays a tax. Also the absence of an ethical consensus on distributional fairness makes it even more difficult to raise taxes fairly. Taxes affect mostly the families’ ability to sustain themselves by reducing the ability to pay their bills such as electricity, water and telephone bills as well as saving for their future. But, even the best of the tax systems will still impose obstacles on firms and families. Also impairs incentives of markets and undermines economic performance.
The modern day tax systems are even worse as they trap individuals in debt. The so called tax breaks and proposals to increase the time span with which to pay taxes are just to lure more and more people into debt. Quoting Kiyosaki in his book Cash flow Quadrant he said that the biggest enemies of people today are taxes and interest on debt. And to top if off, he continues, that the government often offers tax breaks to get deeper into debt. In his opinion in order to be financially free it’s not how much money you make but how much money you keep and how hard it works for you, and how many generations you keep it for. No tax system in the world however is fair enough to help you achieve this, not even our very own.
Kiyosaki, Robert (1999). Cash flow quadrant; Rich dad’s Guide to Financial Freedom. Warner Books Inc. USA.
Lerner A, (1951). Economics of Employment Prentice Hall Publishing.USA
Longman Dictionary of Contemporary English CD
McCluskey, T; William J.; Franzsen, N; Riël, D. (2005) Land Value Taxation: An Applied Analysis. Ash gate Publishing, Ltd.
Melville, A (2009) Taxation: Finance Act 2008: FT Press
Messere K. C., (1993). Tax Policy in OECD Countries: Choices and Conflicts. Peterborough, Ontario: Broadview Press.
Olmert, Michael (1996). Functional Finance and the Federal Debt Simon & Schuster, New York
Parking, Michael (2006) Principles of Microeconomics, Toronto: Methuen Publications
Smith, Adam (selected ed, 1993). An Inquiry into the Nature and Causes of the Wealth of Nations. Warner Books Inc. USA