Integrating Personal Taxes and Benefits - Report Example

INTEGRATING PERSONAL TAXES AND BENEFITS Taxation - Mirrlees review Integrating personal taxes and benefits Introduction The tax system more often than not is the government’s main source of revenue. Tax is a compulsory levy imposed on a citizen by their respective government to finance various projects. This implies that the taxpayer does not receive anything directly in return for paying the tax. Tax has various objectives, which include wealth redistribution, provision of public goods, enhancing economic stability and promoting social welfare (Vickrey 1999). In the United Kingdom for instance, there is an extremely elaborate tax system that has been in place ever since the 17th century. According to the UK’s tax system, classification of taxes is under the following platforms; first, the tax base through which the government levies taxes which could be; capital, income, or consumption. The second classification basis is; whether direct or indirect tax system. This implies that the tax can either be direct or indirect based on who bears the tax. Indirect tax means that the tax can be transferred to a third party while the direct tax is not transferable and hence befalls the intended party (US Department of the Treasury 1992). Thirdly, the UK tax system classifies by value or unit. This implies that the volume of an item or its value would be a determinant of the tax levy. Finally, there is the distribution of the tax burden. The tax system would either be progressive, proportional, or regressive (Watkiss and Downing 2000). The intention of this discussion is to delineate the review’s recommendation to integrate the benefit and income tax systems into one system as well as the limitations and advantages of the proposal. The current UK tax system (benefit and income tax systems in general) The current UK tax system has a different policy for benefits and income tax. Income tax is the single most source of revenue collected by the United Kingdom government (Tobin 1970). There are various insights into the policy including the rates, tax thresholds, and the exceptions. For instance, during the financial 2010 / 2011, the tax allowance for people aged 65 years and above reduces by a pound for income above 100000 pounds. However, in the same year, the chancellor made an upward adjustment increasing the threshold by 1000 pounds. On the other hand, since 2008, the 10 percent starting rate was abolished and; hence, there was a simultaneous drop in the income tax rate from 22 percent to 20 percent. The reforms also affected those earning above 150000 pounds as they would levy a 50 percent tax rate. However, for any income between 100001 to 116210 would lose a 1 pound exemption implying that they would suffice a 60 percent tax rate. The taxpayer’s income assessment happens according to some prescribed orders the income from employment caters for the personal allowance as its taxed first. After income from employment, returns from savings follow inform of interests and finally the dividends earned. The United Kingdom has signed treaties with many countries all over the world seeking to prevent double taxation of income from abroad. Income from abroad by United Kingdom residents fall under UK income hence the earners should remit tax money to the government. It is notable that, rental income is classified under savings and hence taxed after personal income. The only difference is that rental income has a number of allowable deductions that should be made before deducing the taxable amount (Weil 1999). A description of the proposed recommendation The Mirrlees review opines that, the tax and benefit exercise are an expensive ordeal for the government as well as taxpayers and it would be beneficial for everyone if the costs came down considerably. It is eminent that the tax payers derive their motivation to remit taxes from quality services delivered by the policy makers. The major impediments befalling the tax system include; benefit fraud, innocent omissions or commissions, tax avoidance or evasion emanating from the government as well as individuals (Stiglitz 1998). The figures are quite exorbitant and hence if reduced, the UK government would save the tax payers a lot of money. For instance, the government spends 1.24p when collecting both income tax and National Insurance contributions (NIC). In addition, employers incur a minimum of 60 percent per 1 pound collected on behalf of the tax collectors. The individuals filling self assessment are likely to incur a higher amount as the amount is not in the public domain. The most devastating fact is that for every single pound arising from income tax, capital gains, and the NIC’s more than 5.4p is unaccounted for as it is lost through avoidance, evasion and error. Much more money is lost through unclaimed entitlements by eligible applicants. It is apparent that the revenue collection system is frightfully expensive and has massive loopholes (Wakefield 2009). On the other hand, the delivery mechanism is a bit hard to quantify but also need transparency. Transparency in itself is a virtue that seeks to enhance accountability. It is vital for the business practitioners to enforce transparency and accountability in their dealings. Transparency ensures the taxpayers are motivated to remit their tax dues accordingly. It is inherent that the policy makers are human. They should be firm in policy making to attain the best mechanism that will enhance better solutions. The PAYE system directly withholds the income tax from the earning such that the employee receives net salary. However, the United Kingdom uses the non cumulative system which entails calculating the tax due per end month. Using the integrated system, any end year adjustments should be made to ensure that the tax paid tallies with the tax due. However, the Mirrlees review asserts that, this system has a number of inconsistencies and it is only fair if reforms are enforced. According to the Mirrlees review, the PAYE system should be based on a cumulative model. Though this model is not yet internationally accepted, its efficiency and effectiveness is beyond reproach. This is because; the policy requires that the employer should file the tax returns after reconciling the year tax returns. It is noteworthy that the PAYE system attributes to 85 percent of the total United Kingdom tax revenue (Weitzman 1974). The current tax system regulating the remittance of withholding tax is a bit clearer. The procedure for paying taxes on savings, interest rates is simpler as it operates under the assumption that this income is not subject to further taxation. This will lead to loss of revenue through tax evasion, and as such the government should keenly implement the Mirrlees review to avoid such occurrences in the future. The Mirrlees review recommends modernization of the PAYE system such that it will inculcate all the small details missing in the current system. For instance, there are many taxpayers who earn money from various sources (Vickrey 1999). However, such tax payers only remit their PAYE, which is automatically deducted by the system. This means that the government loses a lot of money from the current PAYE system and hence the modernization endeavors would be tremendously beneficial. A synopsis of the Mirrlees review recommendation /the purpose of merging both systems; Maximizing transparency The Mirrlees review wishes to reduce the number of programs as possible. This will aid in enhancing transparency such that any person wishing to review the documents has an easy time. In addition, fewer programs will ensure that the paying and receiving process will be easier hence the taxpayers will feel safer (Stern 2006). Accountability The integrated tax system will ensure that there are verifiable documents during the filling of the tax returns. For instance, the taxpayer should avail the payslips other than relying on self declared income. This will ensure that the new reforms comply to accountability roles such that all loopholes will be sealed (Thaler and Shefrin 1981). In addition, the integrated tax system will minimize the number of gaps between programs. This will enhance simultaneous running in the system such that all delays will be mitigated from the system. Fairness The Mirrlees review seeks justice such that all taxpayers are treated on an equal platform. The current tax system is prejudistic in the sense that, the poor taxpayers are treated differently compared to their richer counterparts (Tuomala 1990). Strengths and weaknesses of the merging recommendation The Mirrlees review has a number of advantages. They include the following; the current loopholes in the tax system will be negated hence tax revenue collected will increase. The key setback is that the Mirrlees review is technology oriented (Turley and Thomas 2006). This will amount to the exorbitant expenses in the implementation stage. However, in the event that the system is well in place, the UK tax collection will increase the level of revenue, reduce collection expenses and enhance transparency. The intended tax reforms will mitigate the number of tax returns to be filled by different applicants. This will enhance the reduction of the length of the tax returns filled, and as such, it will reduce the bureaucratic procedures. In addition, it will ease the process for the tax calculation. The tax collectors will have an easier time in calculating the tax returns as a single return will be filled per person (Taylor, Denham, Baron and Allum 2010). The integrated system will also reduce the chances of duplication of documents. This is because; several benefits and taxes will be combined hence the information and processing will be easier. In the instance that the tax reforms are integrated, the number of agents who collect tax on behalf of the tax collectors will reduce considerably. This is because; it is remarkably easy for the authorities to deal with information emanating from the tax returns (Zee 2006). This will reduce the number of agents required to deal with the tax returns. In addition, the integrated system will ensure that there is synchrony in information hence the tax returns will not be in discrepancy. The potential winners and losers if the move is enacted (certain groups of individuals and/or organizations). The new or proposed tax system by the Mirrlees review, both the taxpayer and the tax collector benefit equally. Given the reduced level of bureaucracy in operations, transparency and accountability, the taxpayer will have faith in the system and hence remit taxes promptly. On the other hand, the tax collector will mitigate the tax evasion loopholes, retain information in an orderly manner and increase the tax base (Stern 2006). This implies that both parties will benefit in the long run in the eventuality that the Mirrlees review is implemented according to the stipulations remitted in its report. The UK tax system has been through vigorous legal processes seeking to readjust and modify to cope with the current business or economic changes. The legal stipulations require that there be a commission that will conclusively enquire on the current system and award any recommendations. In 2008, such a commission chaired by Mirrlees held deliberations on the current tax system. On completion, the commission relayed their assertions through a review commonly known as the Mirrlees review. This review sought to address certain aspects of the current UK tax system. In addition, the tax system will reduce the chances of tax avoidance or evasion as the power work will reduce considerably. Information will also flow simultaneously as the integrated system will be modernized. The integrated system will remove the bureaucratic procedures from the current system thus saving time as well as other resources. This will increase the amount of tax revenue collected. On a general perspective, the Mirrlees review seeks to address the flaws in the current system that reduces the amount of revenue collected. Conclusion It is apparent that tax is a form of regulation which has to undergo multiple reforms to match up to the dynamics in the business world. It is evident that, the United Kingdom tax system has been under serious reforms to refine it to the current system. The variations in tax systems include aspects like the classification of taxes, structure and other inherent policies. Since the tax system is the responsibility of the government, it is inherent that, tax systems will differ from country to country. However, modern governments are combining forces to formulate tax treating that will ease and facilitate more business between the two countries. However, the Mirrlees review recommends overhaul reforms on laws regulating the self employed, landlord and corporation heads. The major shortfall in the current process is the fact that, these individuals have the responsibility to file their own assessments. This is a fundamental loophole in the current system as the individuals filing the returns may avail in the appropriate information. This advanced tax system seeks to ensure that these loopholes cease to exist. With this modernization, the tax collection endeavors will be successful hence increase the taxable base of the UK’s government. Reference list Sørensen, P, 2005, ‘Neutral Taxation of Shareholder Income’, International Tax and Public Finance, 12, 777–801. Stern, N, 2006, Stern Review: The Economics of Climate Change, Cambridge: Cambridge University Press. Stiglitz, J, 1998, ‘Using Tax Policy to Curb Speculative Short-Term Trading’, Journal of Financial Services Research, 3, 101–15. Taylor, C, Denham, M, Baron, R, and Allum, A, 2010, Welfare Reform in Tough Fiscal Times: Creating a Better and Cheaper Benefits System, London: Taxpayers’ Alliance (http://www.taxpayersalliance.com/welfarereform.pdf). Thaler, R, and Shefrin, H, 1981, ‘An Economic Theory of Self-Control’, Journal of Political Economy, 89, 392–406. Tobin, J, 1970, ‘On Limiting the Domain of Inequality’, Journal of Law and Economics, 13, 263–77. Tuomala, M, 1990, ‘Optimal Income Taxation and Redistribution’, Oxford: Clarendon Press. Turley, C, and Thomas, A, 2006, Housing Benefit and Council Tax Benefit as In- Work Benefits; Claimants’ and Advisors’ Knowledge, Attitudes and Experiences, Department for Work and Pensions Research Report 383, Leeds: CDS (http:// research.dwp.gov.uk/asd/asd5/rports2005-2006/rrep383.pdf). Vickrey, W, 1999, ‘Simplification, Progression, and a Level Playing Field’, in K. 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