UK Taxation Compared with Singapore Taxation - Essay Example

?UK taxation compared with Singapore taxation A. Why the UK government taxes its citizens Based on the official online publication of the Parliament of the United Kingdom, the key objective of the United Kingdom’s tax policy is to raise revenues to finance government priorities (UK Parliament, 2011). According to the online publication, the government of the United Kingdom “is committed to reinforcing the sustainability of the fiscal position” of the United Kindom. In addition, the UK adheres to tax efficiency in that “the tax system should place minimum economic costs on society and markets while helping provide the right incentives to growth” (UK Parliament, 2011). In implementing the principles of tax efficiency, it adheres to “fiscal neutrality” in the sense that the tax system is implemented such that “it does not interfere with the workings of the markets or the decisions of the households while minimising the disincentive effects” of government taxes on he level of economic activity. Subscribing to the perspective of the OECD that “an efficient tax system” is achieved via a mix of different taxes, the UK tax system combines various types of taxation to promote taxation efficiency (UK Parliament, 2011). Another important policy anchor on which the UK taxation system rests is fairness. According to the UK Parliament (2011), this means that “the burden of tax should reflect the ability to pay while incorporating principles of intergenerational equity.” A defensible way of interpreting the policy declaration is that the UK’s tax policy is governed by equity taxation which can be extended to mean that taxation can be used to promote equity. The UK’s notion of equity, however, covers the promotion of social and intergenerational equity. This means that equity across social groups is promoted (without promoting disincentive to work and do business) as well as intergenerational equity. In the literature, the latter is usually to taken to mean that the environment is protected in the interests of both the current and future generations. The UK government’s notion of fairness covers fairness among current social groups and fairness between the current generations and future generations. Based on the UK Parliament (2011), UK’s taxation system adheres to horizontal and vertical equity. It is a standard notion in economics that horizontal equity means that those who earn the same should have equal burden of the tax while vertical equity means that those who earn more should share a higher burden of the tax: those with the same ability should pay the same tax and those with higher abilities should pay more taxes. The UK Parliament (2011) also emphasised that in promoting fairness in taxation requires that the UK government create policy measures that prevent tax avoidance and evasion. Finally, another important reason given by the UK Parliament on why the government of the UK imposes taxes is that people must get value for their money. This is interpreted to mean that the UK taxation is designed and people are taxed in a manner that compliance and collection costs are marshalled to a minimum (UK Parliament, 2011). In sum, based on the UK Parliament’s publication, the core principles of the UK government’s tax policy are sustainability, efficiency, fairness and value for money. The four principles provide the basis as well as the reasons on why a certain tax policy is adopted and the manner by which a tax policy is implemented. At the same time, the articulation of the four principles should not obscure a fundamental fact: the “main aim of the tax system” of the UK is to raise revenue (UK Parliament, 2011). The UK Parliament (2011) publication declared that if tax policy is used to support other objectives then it should be interpreted as an attempt by the tax system to produce the best value for money. With the ongoing global economic difficulties that are believed to have originated from the United States sub-prime crisis of 2008, UK’s taxation policies are also supportive of the efforts towards economic recovery (OECD 2011, p. 3). B. Comparing UK with Singapore Taxation 1. Taxation in the UK The United Kingdom used to rely more on direct taxation. However, “a major shift from direct to indirect taxation in the UK began in the late 1980s” (Williams 2009, p. 9). The “VAT was increased from 8 per cent to 15 percent in 1987 (subsequently increased to 17.5 percent in 1991); the top rate of income tax fell from 60 per cent to 40 per cent in 1988; the basic rate of income tax, which had been between 30 and 35 per cent over the previous ten years, fell in stages from 30 to 25 per cent between 85/86 and 1988; and the corporation tax fell from 40 percent o 35 per cent in 1986, having been 52 per cent for most of the previous decade” (Williams 2009, p. 9). The trend towards indirect taxation is criticized by Frieden (2011). According to Frieden (2011, p. 2), indirect taxation “pose a growing risk to global business.” Yet, Frieden (2011, p. 2), the “European Union is so reliant on VAT that Member State must maintain a standard rate of at least 15%.” The situation is even worst because according to Frieden (2011, p. 2), “many nations have exceeded this requirement, and in just the first few months of 2011, seven of the 27 EU Member States enacted higher VAT rates, bringing the average rate over 19%.” 2. Taxation in Singapore In Singapore, “taxes are used to develop Singapore into a stronger community, a better environment and a more vibrant economy” (IRAS 2007). The Inland Revenue Authority of Singapore (2007) articulated that the long-term objectives of Singapore’s taxation system is to support non-inflationary economic growth, balanced budget, delivery of public services and protection of the environment. This support is mainly through revenue raising and the promotion of economic and social goals (IRAS 2007). According to IRAS (2007), “tax has been used to influence behaviour towards desirable social and economic goals.” One example of this is that “to encourage mechanisation and automation, the government allows accelerated capital allowance for most assets used for business purpose” (IRAS 2007). Another example is that “to encourage Singaporeans to have more children, tax rebates are given for the first to fourth child” (IRAS 2007). In Singapore, there is a “balanced mix of tax on consumption and income “that is designed to reduce the vulnerability of Singapore “to adverse changes in economic conditions” and strengthen the economy’s resilience to crisis (IRAS 2007). There are income taxes on individuals and companies (IRAS 2007). The various forms of taxes in Singapore include the income tax, property tax, estate duty tax, motor vehicle tax, customs and excise duties, goods and services tax, betting taxes, stamp duties, and several others (IRAS 2007). Based on IRAS (2007), the corporate income tax rate on Singapore is from 0 to 8.5%: 0% on foreign-source income not brought to Singapore, 0% on capital gains accrued by the company, 0% on company profits not brought to Singapore, 0% on foreign-sourced income, 17% on company profits on corporate profits above 300,000 SGD, and only 8.5% on company profits below 300,000 SGD. As for the personal tax rate, the tax rate on the first 20,0000 is 0%, next 10,000 SGD is 2%, 3.5% next 40,000 SGD is 7%, next 40,000 SGD is 11.5% and increasing until the maximum of 20% income tax rate is reached for income above 320,000 SGD (IRAS 2007). The goods and services tax rate is 7% (IRAS 2007). 3. Convergence and divergence in UK and Singapore taxation The key convergence between the UK and the Singapore tax system is the role both tax systems place on the role of indirect taxation or taxation on consumer goods and services. However, one key difference is the UK tax rate for indirect taxation versus the Singapore’s tax rate for the same. UK’s tax rate for indirect taxes is 17.5% versus Singapore’s rate of only 7%. More important, Singapore’s tax system appears more supportive to government interference on the economy while the UK’s tax system appears to be less interventionist. Adam Smith prescribed four cannons of taxation should be established based on equality, certainty, convenience of payments, and economy in collection (Alley and Bentley 2005, p. 586). It is not immediately possible to evaluate the tax systems of the United Kingdom and Singapore based on the four cannons. Meanwhile, in 1776, Smith limited to only three core tasks, the role of government. These roles are in defence, administration of justice, and “maintaining public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expenses” (Smith 1776, pp. 578, 579, 590). These roles imply that the role of tax system in the economy would have to be limited. The UK tax system is relatively more consistent with the Smithsonian values. References Alley, C. and Bentley, D., 2005. A remodelling of Adam Smith’s tax design principles. Bond University: ePublications@bond. Available from http://epublications.bond.edu.au/law_pubs/45 [Accessed 19 May 2012]. Frieden, K., 2011. Why indirect taxes pose a growing risk to global companies. Ernst & Young Publication. IRAS, 2007. An overview of the Singapore tax system. Singapore: Inland Revenue Authority of Singapore. Available from http://www.iras.gov.sg/irasHome/page03a.aspx?id=5676 [Accessed 18 May 2012]. Janus Corporate Solution, 2012. Singapore income tax system & tax rates. Singapore: Janus Corporate Solution. OECD, 2011. OECD economic surveys United Kingdom. Paris: Organization for Economic Cooperation and Development. Smith, A., 1776 (2005). An inquiry into the nature and causes of the wealth of nations. A Penn State Electronic Classics Series Publications. Philadelphia: Penn State University. UK Parliament, 2011. The principles of tax policy. Available from http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/taxpolicy/m35.htm [Accessed 18 May 2012]. Williams, D., 2009. Direct taxes or indirect taxes. KPMG: Tax Business School. Read More