Concept of Equity in Taxation - Essay Example

Name : xxxxxx Tutor : xxxxxxx Title : Concept of Equity in Taxation Institution : xxxxxxx @2010 PART A Ever since its inception by Adam Smith in the 18th century, the concept of equity has undergone a full metamorphosis to its current state. Smith’s postulation that taxes are admitted in a manner that is deemed fair to all people still remains the key consideration for the government’s taxation policy. Adam smith captured equity as a major canon of taxation alongside efficiency, certainty and economy. In his book known as Wealth of Nations, Adam Smith holds that the citizens of a given nation need to make their contribution towards government support in a manner that is as close as possible to their relative abilities; that is in a relative amount of the particular earnings they make under government protection (Smith 1776). The equity canon thus suggested that people should be taxed in accordance to their ability to pay and in a manner that equitably applies to all citizens. Further, Smith notes that rich citizens should bear a bigger burden of taxes since they have greater payment ability. Proportionality is of paramount importance as it ensures fairness in taxation of all the involved groups. Other canons have a special relationship with the fairness canon. They are: certainty which states that every citizen should pay an amount of tax that is certain and not arbitrarily fixed. The manner, time and quantity of payment must be certain to all taxpayers; convenience which demands that every tax ought to be levied at the time or manner, which is most convenient to the taxpayer; economy suggests that a taxpayer ought to contribute in a manner the strike an economic balance between his earnings and his nation (Smith 1776). Further advancements and changing world trends have led to addition of other tax principles such as productivity, elasticity, simplicity and diversity by economists of the successive centuries (Baumol n.d). Substantial modifications have been made to Smith’s concept of fairness to reflect the current state of affairs in terms of equitable taxation. In advancing equity as a major consideration for taxation, Adam Smith advocates for fairness based on payment ability. Smith definition seems to target more of the wealthy class at the relief of low income earners. A preview of the economic scenario in the 18th century reveals that taxes were mainly derived from income. At that time, income comprised rent, profits and wages. Inconsistencies in collections heavily affected profits and wages as computing this amounts links directly to the trade and industry sector, the great source of wealth then. Such are the circumstances that compelled Smith to press for proportionality basis in tax payment. At some instance, he adopted Physiocratic ideology in insisting that rents fetch good taxes as compared to wages and profits. On land matters, Smith recommended that taxes on lands cultivated by their owners should be lower than taxes on land owned by absentee landlords (Baumol n.d). On the other hand the Chancellor of the Exchequer takes the interpretation and actualization of fairness a notch higher to be in tandem with the developments in the 21st century. Chancellor Alistair’s definition takes a broad perspective of fairness and is all inclusive in the various aspects of taxation. Whereas Smith concentrates on rent, wages and profits as the major source of taxable income, Alistair goes further to enlist salaries, Pension, inheritance, VATs, insurance, corporate and international gains as the sources that fetch government taxes. Smith laid emphasis on individual taxes since it was the primary source of taxes at the time while urging the wealthy class to bear greater responsibility in government contribution. A more progressive approach has been adopted by Alistair in the taxation policy (Baumol n.d). Over two hundred years since its advent, the concept of fairness or equity has experienced a number of changes to be at par with the current global trends. Emergence of more centralized forms of government instituted on the tenets of democracy has played a key role in modifying the revenue collection procedures to satisfy all the citizens. As a matter of fact, the government made deliberate efforts in formulating policies that enhance fairness to all the stakeholders in the economy. The treasury departments of various governments have engaged economists in streamlining taxation to fully address the nation’s goals and cater for citizens’ interests. Industrial revolution between the 18th and 19th centuries marked a deeper approach to taxation. Coupled with a modernized education system, development of industries meant more income to the people and the nation. Additionally more jobs were created on permanent basis to earmark tremendous economic growth. These developments however came with extra needs that required government intervention to maintain a fair competition in industrial players and sustain a favourable taxation system for all. Further advancements in successive years created more opportunities and expanded the taxation framework. Notable events include the global economic recession in 20th century while become a defining moment for the fiscal policy that upholds a satisfactory balance of payment, a high and stable employment level, a fair distribution of income and wealth, enhanced social security, a high rate of economic growth among other benefits. Fairness forms the basis on revenue collection through both direct and indirect taxes. Later technological and commercial developments in the 20th centuries set the centre stage for corporate organizations and multinational companies that constituted crucial sources of government revenue. However, an increasing disparity between the rich and poor become a concern to the government. It definitely called for an elaborate policy to have a healthy distribution of wealth among its citizens. This again modified the understanding of fairness to encompass all state efforts ensure that every citizen accesses improved standards of living and a chance to fulfill their potential (Baumol n.d). In order to wholesomely meet the needs of each citizen in this dynamic world, the government implemented policies to cater for the full welfare of its citizens. This can be seen Insurance measures, hospital schemes, mortgages, vehicle allowances, value added tax on public goods, inheritance and pension schemes. These forms of fairness resonate well with the current economic status of the country. Conclusively, the concept of equity/fairness has greatly evolved from its original definition to its current state. Fairness has been heavily ratified to encompass the fully well being of taxpayers to realize their potential. As articulated above, these changes were necessitated by the changing global trends especially in trade and industry. The concept still has room for further fine-tuning to be appropriate to the needs of all involved parties. PART B Chancellor Alistair Darling’s Pre-Budget report of 2009 aptly captures the advanced understanding of fairness concept at the moment. At a glance, the Chancellor of the Exchequer underscores the government’s commitment to promulgate a fairer society in which every citizen can access improved standards of living and have a chance to fulfill their potential A wide range of taxation measures forwarded in Alistair’s report point at a keen interest in maintaining fairness at all levels. Most of the tax waivers, deferrals, increases and decreases found basis in equitability on taxation. Both individuals and corporate groups were incorporated in the budget’s scheme that emphasized fairness in administration of taxes. The Chancellor of the Exchequer clearly understands the weight of this matter especially at a time when the environment is highly charged politically. As a matter of fact, the country was licking the wounds of a glaring global recession that had taken the world by storm. The Exchequer Chancellor therefore outlined efforts that would mitigate these recession effects (Alistair 2009). A brief overview of the 2009 pre-budget report reveals how equitability in paying taxes took centre stage. The report cuts across all main taxes that include income tax, corporate tax, Capital Gains Tax (CGT), Value Added Tax (VAT), Insurance (NIC), inheritance and pension tax. The chancellor’s decision to defer the one percent increase on corporate tax for small firms and extending the repayment time points at the firms’ limited ability to pay the prescribed taxes. Ability to pay principle forms a key basis on which the concept of equity is advanced. Therefore by taking such decisive measures, the Chancellor of the Exchequer can be viewed as acting in a manner that is relatively fair to the small firms. A point to note is that the tax was maintained at twenty one percent from the previous year’s allocation (Alistair 2009). On matters of insurance, the chancellor announced a further rise of 0.5% effective from April 2010. In an apparent effort to uphold the principle of fairness, the starting point was to be raised so as the scheme does not affect those who earn less than twenty thousand sterling pounds. An important equity aspect was the temporary increase of threshold for empty properties liable for business rates to fifteen thousand sterling pounds. This move alone exempted seventy percent of the country’s empty properties in total. Equity has also been reflected on fuel levies where the fuel benefit multiplier and the national insurance contributions (NICs) paid by employers in free private fuel production were based on eighteen thousand pounds effective from April 2010. Additionally, where fuel is provided for private travel in company vans, the amount was increased to five hundred and fifty pounds, a measure that was to take effect at the same time in the following year (Alistair 2009). Personal measures taken in the pre- budget report are perhaps the best reflection of equitability in taxation. Persons with a basic band rate of thirty seven thousand four hundred pounds attract a tax rate of 20% whereas incomes higher than thirty seven thousand four hundred pounds attract a 40% tax. Incomes over one hundred and fifty pounds have an additional tax rate of 50%. Further, the chancellor chose to align the primary threshold and lower the profit limits with income tax personal allowance. A further increase of five hundred and seventy pounds was meant to compensate lowest earners (those earning twenty thousand pounds or less)(Alistair 2009). Alistair does not lose touch with fairness by freezing the inheritance tax allowance at three hundred and twenty five pounds for individuals and six hundred and fifty pounds for married couples and civil partners in the 2010/11 period. The chancellor also maintains the Capital Gains Tax exempt amount at ten thousand one hundred pounds for individuals and five thousand and fifty pounds for most trustees. Such measures are taken in consideration of the state and its taxpayers. On pension matters, Chancellor Alistair declared an increment of 2.5 percent to the basic pension enjoyed from state. Starting in April 2010, earning a full basic State Pension will be worth £97.65 a week. The rate of full couples who are entitled to pension on the basis of their partners received an increment up to £156.15 a week, as stipulated by the policy of up rating the basic State Pension by RPI or 2.5 percent, whichever is higher. Alistair also made an announcement that tax relief on pension contributions will be limited for persons earning £150,000 and over starting April 2010 based on an income floor so that tax relief for persons earning below £130,000 (before the pension contributions of the employer are included) will not be limited. The chancellor as well hinted an increase in the pension credit’s minimum earning guarantee to £132.60 for single pensioners and £202.40 for couples in 2009/10. Once implemented, these progressive steps will help bequeath pensioners higher power of spending and a better standard of living in years to come by alleviating hardship in retirement and setting out ideas for long-term changes to the system to deliver opportunity and fairness for the next generation of pensioners. Following a spirited campaign on global climate change, the chancellor reflected favourable Green measures for the nation and its citizens. Starting April 2011 the levy charged on sectors that are energy intensive will increase from the current 20% to 35%. However, claimants will have to provide fresh certificates that confirm their new relief entitlement from their energy suppliers. Such a move can be deemed fair to the people since it aims at protecting them from dangerous carbon emissions at the same time compelling the industries to take responsibility of their waste material. Treasury also plans to end the Stamp duty land tax (SDLT) holiday to revert to the £125,000 threshold (Fiaz n.d). Concerning equitable liability, Chancellor Alistair referred to the concession published in a Tax bulletin in 1995 which requires that a taxpayer either shows that the figure of tax due is excessive or shows what the correct amount should have been and brings his or her tax affairs up to date, including payment of tax, interest and penalties so that he may be exempted from that deduction. This concession protects the taxpayer from being unfairly taxed. Furthermore, it is worth mentioning that anti-avoidance measures have become an integral part in taxation. Alistair’s report recommends a number of anti-avoidance measures to enhance efficiency and equity in taxation. Such measures include the New Disclosure Opportunity (NDO) on offshore bank accounts, inheritance tax avoidance schemes Disclosure of Tax Avoidance Schemes (DOTAS) among other measures. These measures serve to ensure that the government gets its fair share of revenue while upholding responsibility in tax payment. (Alistair 2009). In conclusion, the Pre-Budget Report aptly captures the concept of equity and fairness in the current taxes and measures taken by the Chancellor of the Exchequer. It upholds the principal of proportionality in tax payment and the need to assist taxpayers realize their full potential to enjoy high living standards befitting the developing trends in the nation. Bibiliography Smith, A 1776, Wealth of Nations. Baumol, JW n.d, Microeconomics: Principles and Policy. Fiaz Ahmed n.d, Notes on Economics. Alistair Darling 2009, The Pre-Budget Report 2009. Read More