Incidence of Income Tax - Term Paper Example

 «Incidence of Income Tax» VAT is sometimes regarded as an anti-poor tax. It impacts hardly on lower-income groups and results in exacerbating the financial predicaments of poor. Following are some of the impacts of VAT on low-income groups: VAT ultimately increases the prices of goods as the “burden” of the tax is passed on to consumers by the producers/manufactures. Resultantly, with increased prices, it makes things worst for poor with ever-decreasing purchasing power parity. As noted above, VAT increase prices of consumer goods which eventually impacts the consumption patters of people with limited income. It also affects the saving of people with lower incomes as the major share of their incomes goes to the acquisition of consumer goods –whose prices are raised after imposition of value added tax. It is a proven fact that VAT affects rather mildly to higher-income class than to people with limited or little income. From a layman’s view, the income effect is straightforward: as taxes go up, households are poorer and behave that way. For example, if leisure is a normal good, then higher taxes will induce consumers to consume less leisure. However, if one takes a closer look into the substitution effects on income tax one finds a different side of the story. However, under the progressive income tax policy (a progressive tax takes a larger share of the income of high-income taxpayers than of low-income taxpayers). The incidence of tax is shifted more on the high-income group than to the low-income group (Samuelson and Nordhaus 1992). Following are the effects of taxation on income: Under progressive income tax policy a family with $50,000 income is taxed more than one with $20,000 of income. Not only does the higher-income family pay a larger income tax, but it in fact pays a higher fraction of its income. Such income tax policies are aimed to minimize the distortions between haves and have-nots. It influences the consumption patterns of higher-income families and affects overall consumption patterns of an economy. On the other hand, progressive income taxation policies are politically controversial issues and are regularly used in electoral campaigns. QUESTION NO. 2 A larger share of burden of VAT falls upon the consumers because the producer / manufacturer (VAT registered persons or companies) pass on the financial impact of such a tax on to the consumers. Suppose that a product, say laptop, has been imposed a VAT. The burden of this tax imposition will not be born by the supplier or manufacturer of the laptops rather it will be passed on to its customers by raising the price of laptops by the percentage of the tax imposed. The ultimate consumer bears the burden of VAT and it’s him whose consumption is being affected through a value-added tax. QUESTION NO. 3 Advantages: Registration for VAT makes an overall good impression for your company. Since large corporations usually register for VAT, therefore, if a newly established company registers itself for VAT, the customers, and for that matter suppliers, heed it as an established, large company. Registration for VAT also has financial benefits. If a newly-established company registers for VAT then it automatically avoids the penalties for non-registering when it becomes legally mandatory to register for VAT. It is a precautionary step. VAT registration has another financial benefit. If a company who is registered for VAT ends up having most or all the sales at a zero rate then it can demand VAT refund that it had been charged during the period of sales at zero rate. Disadvantages: The company is now legally required to begin maintaining VAT records, which requires plenty of paperwork, filing in regular VAT returns, and details of company’s sales and purchases. If the VAT registration is deferred and backdated, the company may require to formulate particular arrangements to cover its VAT liability. The company can not reclaim the VAT it has been charged if it supplies to a business or company who is not registered for VAT. QUESTION NO. 4 Adam Smith described four major purposes of a tax which are summarized below: Revenue: the basic purpose of a tax is to raise revenues for government to enable it to undertake its duties efficiently. Redistribution: It’s also another important purpose of a tax. A tax is levied to redistribute resources from the high-income group (the one who is taxed) to low-income group (the one who normally gets the benefit of a tax). It is mobilization of resources from haves to have-nots. Reprising: taxes are imposed to control the consumption behavior of people. For instance, if government wants to limit the use of alcohol it might levy a tax of purchase or production of alcohol-based products. Taxes effect prices of goods and hence, control buying behavior. Representation: the forth purpose of a tax is representation. The American phrase “no taxation without representation” implies that I people want to be represented then that have to pay something to the government. Taxes make governments accountable and people responsible. QUESTION NO. 5 Adam Smith in his famous book The Wealth of Nations defined four characteristics of a good tax. Following are those canons of taxation with brief explanation: A. Equity Taxes must be related to each tax payer’s ability to pay and/or to the benefits he gets from the state (these obviously do not coincide). Horizontal equity requires that any two ‘‘identical’’ persons must be treated ‘‘identically’’—which clearly leaves some room to interpretation. Vertical equity requires that some taxpayers, for instance, because of a higher ability to pay, must pay more than others. B. Non-arbitrary Taxes must be clearly defined and not arbitrary. The rules pertaining to imposition, collection, and administration of entire taxation system should be clearly defined. C. Less-cumbersome Taxes must be collected in a reasonably painless way. The cost of tax collection must not exceed its benefits both in financial and physical terms. D. Efficient Taxes must have low costs, both in administrative terms and in terms of the inefficiencies they cause in the economy. QUESTION NO. 6 Inheritance tax is regarded as a volunteer tax because proper planning and know-how of taxation rules can significantly reduce the amount of tax, and in some cases, can eliminate it altogether. The important thing is the heirs are aware of tax laws and must plan it before it becomes too late. On the other hand, if heirs do not plan their inheritance tax then it could become a serious financial burden for them. Non-planning of inheritance tax can lead to payment of a large chuck of money to the authorities. It benefits only to those who plan to well ahead. QUESTION NO. 7. A good and updated knowledge of the following issues are mandatory for a new employer for PAYE and National Insurance: First, an employer must be aware of PAYE and NIC rates and limits for the year that has come to an end. These rates and limits change regularly and their proper knowledge and understanding is mandatory. Secondly, not only the knowledge of rates and limits are important but also of which codes are to be used. It is very importance to use a code that is applicable to a particular situation. It is important that an employer must be well aware of the deadline of submission of PAYE. Knowledge about the total no. of employees. Calculation of total annual income and must be made and according to the prevailing laws. QUESTION NO. 8 An ISA of £6,000 pa is preferred over Personal Pension Scheme premiums of £6,000 pa for many reasons. Some of those are summarized below: An ISA provides an investment up to £7,200 on a tax-efficient basis each year. An ISA investor is not liable to pay income or capital gains tax on the proceeds of an ISA. The investments one holds within an ISA grow largely free of income and capital gains tax. There remains an income tax incentive for higher rate taxpayers, who have no further income tax liability on dividends received on ISA investments. Individual savings accounts guarantees a more comfortable retirement for basic-rate tax payers. On the other hand, pensioners do not have the similar advantage. Another advantage of investing in ISAs is in case of death of investor income from ISA-backed assets can be passed on to a spouse –which might not be the case in pension schemes. In case of a pension fund, transfer of capital to beneficiaries is not always possible to due to legal restrictions. On the other hand, such transfer is always possible in case of an ISA. Bibliography 1. Samuelson, P. and Nordhaus, W. 1992, Economics, McGraw Hill, Singapore. Read More