Introduction
The taxation system is the largest contributor when it comes to government revenue. There are five basic principles when it comes to the idea of taxation. These principles are: 1) to raise revenue, 2) reprice certain goods and services (tobacco, alcohol, etc.) to meet social objective, 3) income and wealth redistribution, 4) raise representation within the democratic process, and 5) to reorganize the economy (Murphy, 2009, p. 211). It is a firm argument that all of these principles must be in place in order for the concept of taxation to work.
The meaning and importance of equity (fairness) in UK taxation
In 1776, Adam Smith introduced the principles of a good tax system. These principles consisted of four maxims. These maxims were: equity, certainty, convenience and efficiency. Equity primarily dealt with an individual’s ability to pay. Certainty is the idea that taxpayers should know how much they are liable to pay. However, the taxpayer cannot be able to avoid paying the taxes. Efficiency is the requirement that states a taxpayer should know when their taxes are due. Lastly, efficiency, or economy, requires the tax system to enough revenue in order to pay for the money spent by the government without having any negative effects on businesses or individuals. The cost of actually collecting the tax should not exceed the value of the tax itself (Friedman, 1997, p. 7).
Many believe that over the past twenty years, the tax system in the UK has lacked any coherent strategy. As a result, the UK tax system revolves around vested interest and change only happens when it brings an advantage to taxpayers. “This has created voluminous legislation, complexity and the opportunity for abuse but without delivering a tax system that conforms to the qualities noted above (Murphy, 2009, p. 212).
“In economic terms it can be argued that justice is created if the marginal loss of wellbeing to each taxpayer as a result of the tax payment they make is equalized” (Murphy, 2009, p. 213). Equity exists when this principle is applied throughout all of the taxes, not just to one tax. This principle still exists in the UK, however, taxes are somewhat different after years and several tax reforms throughout the nation.
Adam Smith and the Canons of taxation
Adam Smith is considered the father of the modern political economy. With this, he has create four main principles of a political system. These four principles are called the cannons of taxation. As mentioned about, the four principles of a good tax system are: 1) canon of equality, 2) canon of certainty, 3) canon of convenience, and 4) canon of economy or efficiency (Fleischacker, 2004).
The canon of equality is very important when it comes to taxation. The use of the word equality does not mean that people should pay the same amount of taxes. This would displace the equality of the tax system. Instead, equality means the quality of sacrifice. This means that people are required to pay a taxes that are proportionate to their income. This proportionate idea is the branched from the idea of progressive taxation which stats that the percentage of taxes should increases and decrease with income (Boskin, 1985).
The canon of certainty implies that the individual should have certainty when it comes to the amount they are required to pay upon the end of the year. Giving an individual certainty allows them to adjust their income according to how much money in taxes that individual is expected to pay that year. Both the state and the individual benefit from the idea behind the canon of certainty. While the individual is given certainty on the amount they must pay at the end of the year, the government is given certainty on how much they are expected to receive each year. This gives the government a framework on when and how much they are going to be receiving that year (Fleischacker, 2004). In other words, both the government and the individual can make future plans with their money if they know when and how much they are expecting to pay/receive.
The canon on convenience means that all taxes should be levied at the time and place that is most convenient for the individual paying the taxes. For example, taxes on crops are only assessed after the crop is harvested. This allows convenience when it comes to that farmer paying taxes. Other taxes, such as property tax and income tax, should be assess whenever the taxpayer is expected to have money. The way of payment should also be convenient for the individual who is paying taxes (Fleischacker, 2004).
Lastly, the canon on economy implies that the expense of taxation should not exceed the amount of taxes. The expense when it comes to collecting taxations should be kept to as little as possible. Collecting taxes should also be efficient. The government should not choose high salaried individuals to collect taxes. This would make the process of collecting taxes considered uneconomical. Tax is also considered uneconomical if it immigrates to other counties (Fleischacker, 2004).
As time as gone by, others have created four more canons of taxation. These canons are: 1) canon of productivity, 2) canon of elasticity, 3) canon of simplicity, and 4) canon of diversity. Canon of productivity states that taxes should only be levied if they produce sufficient revenue for the government. If one large tax yields more of a return than several little taxes, the larger one should be implemented in order to create a higher return. Canon of elasticity indicates that the tax system should be elastic so that if the government needs more money, it has the ability to collect any extra financial resources without incurring any additional costs to the tax system. Income tax and postal rates are examples of canon of elasticity. Canon of simplicity states that the tax system should be simple and easy for a tax payer to interpret. Difficulty interpreting taxes will only lead to oppression. Lastly, canon of diversity implies that the tax system should have several taxes that are economical (Fleischacker, 2004).
UK Current Tax System
There are three different levels of government in the United Kingdom. These levels are: the central government, the national governments, and the local government. The revenues of the central government come from sources such as income tax, corporation tax and fuel duty. The revenues from local government are funded by the central government. The central government gives the national governments grants. Taxpayers are be required to pay to all three levels of government (Murphy, 2009, p. 211).
The tax system has changed in the UK over the years. Originally, the tax system would tax a person’s income regardless who was entitled to it. Now, people are only taxed on income that they are entitled to. Also, the ways in which the government levies taxes has changed. The UK went through a rapid change in 2010 when the government decided to conduct a tax reform. This tax reform was created in order to lower taxes and increases wages throughout the United Kingdom (Gauke, 2015). According to Gilbert (1997), “in a successful, dynamic economy, workers earned a wage above subsistence thanks to the ongoing process of capital accumulation, which expanded the demand for labor faster than it supply” (p. 274). Thus, the UK tax system is now set up to increase income by increasing productivity throughout the workplace.
Income tax is the largest source when it comes to government revenue. It makes up approximately thirty percent of the total revenue produced. The National Insurance is the second largest source for government revenue. It contributes to approximately twenty percent of government revenue. Every person who works in the UK is subject to income tax, regardless of citizen status. Each person is given a personal allowance for their income tax and income up to that amount is tax free. For example, the personal allowance for the 2015-16 tax year for individuals under the age of 65 with less than £100,000 is £10,600. That means that the first £10,600 an individual makes is tax free (Adam, Browne & Elming, 2015, p. 375).
Income is taxed based on an order. First, an individual’s income from employment is taxed first, then interest earned on savings income, and then dividends. Rental income is taxed as savings income but only after deducting mortgage interest (Mathieu, 2010, p. 352).
The second largest source of revenue is the National Insurance contributions. These contributions are paid by employees, employers and individuals who are self-employed. These individuals’ contributions are based on several factors. Some of these factors include age, income and employment type. Employers may also pay into the National Insurance contributions on behalf of their employees. Several organizations use this as one of their company benefits (Hills, 2004, p. 347).
The third largest source of revenue for the government is the value added tax (VAT). VAT was introduced in the UK in 1973. VAT actually replaced what was known as purchase tax and selective employment tax. “VAT is, in principle, a tax on the economic contribution of a business-its ‘value added’- and, as in national income accounting, the amount of value added can be determined by calculating either net output (i.e. sales minus purchases) or net income generated (i.e. wages plus profits), since, by definition, the total output of a firm equals its total income” (Godwin, 1993, p. 237). In other words, the value added tax is a percentage charge on supplies of goods and services. Thus, the value added tax is a consumer tax. There are certain goods and services that are exempt from value added tax. Other items are subject to a lower rate being charged. The highest rates are generally on luxury items. The value added tax rate fluctuates depending on the economy. For example, domestic fuel was up to 17.5 percent in 1991. However, rates drop significantly in 1994 when the value added tax was only 8 percent for domestic fuel (Goodwin, 1993, p. 240).
Extent to which the current taxation system reflects the concept of equality
It can be said that taxes can be justified if the marginal loss the taxpayer endures is equalized throughout society. As an individual’s income increases, so does their marginal loss. Thus, keeping how much one loses proportionate to their income. This theory is based on the concept of equality.
The original idea of the UK tax system has stuck to the basic principles of a good tax system. All the taxes were based off of a percentage system. This allows optimal fairness and equity. Flat rate payments would not be equal or fair. This would either make it unfair to the poor or make it unfair for the rich. For example, charging each person the same amount every year would be disproportionate wealth. If the amount paid is set for the poor to afford, then the government would not gain enough capital to run the government efficiently. Furthermore, the rich would be the only one who would gain from this because the amount they have to pay is minuscule compared to their income. The rich would be the only one who gains anything by a low cost flat fee for taxes.
Proportionating taxes out based on a percentage of income is fair for everyone. This way, every tax payer is paying the same amount of taxes relative to their income. This also makes taxes somewhat affordable for everyone. After repeated occurrences, individuals may even forget about taxes when they are relative to their income. Over, paying £600 for someone who makes £1,000 a month is different than someone paying £600 who makes £3,000 a month. Making these payments a percentage for both person is overall fair. It makes the payments affordable for both parties and both parties are paying the same amount that is relative to their income. However, the UK does not follow the rules of equality completely. A new tax reform eliminated some individuals from paying income tax while reducing income tax for others. The Summer Budget Report by the Chancellor of the Exchequer discusses the new tax reform and the effect it has on the economy.
Summer Budget Report 2014
The Summer Budget Report by the Chancellor of the Exchequer helps to ensure economic security for the individuals who work but putting public funds up so society can have a more balanced, productive economy. This budget is what is responsible for national security. It also sets out reforms when it comes to taxes and welfare. This budget is responsible for introducing the National Living Wage. The National Living Wage helped Britain move from a low income, high taxes area to a high income, low tax economy (Gauke, 2015).
In 2010, the government in the UK created a long-term economic plan. This plan has caused the national debt to fall in 2015. In 2014, the UK was the fastest growing economy. Employment in the UK has broken records and wages are able inflation. However, the deficit in the UK economy is still too low while productivity is too low. Thus, the economy is to unbalanced. More needs to be done in order to build up the regions and nations throughout the UK. The UK should also work on fixing the productivity between the north and the south of the UK (Gauke, 2015).
The UK’s long-term economic plan has paved the road for a stronger economy. This recovery plan is now well established and already in effect. The UK continues to strengthen economically every years since 2010. The government has a firm belief that the only way the nation can truly recover is through rebalancing the British economy. This is based off of investments and corporation across all the regions in order to balance the economy (Gauke, 2015).
Government spending goes to several different sections of the economy in the UK. These sections include: government debt, public order and safety, housing and environment, industry, agriculture and employment, defense, education and social protection. Social protection is the biggest part of government spending. It accounts for approximately £231 billion of government spending. This is out of a total £742 billion in 2015. This money comes from: council tax, business rates, VAT, corporation tax, National Insurance contributions and income tax. Income tax is the biggest section when it comes to public sector receipts. Income tax accounted for £170 billion of the money that was gathered from taxes in 2015. This was out of a total of £673 billion (Gauke, 2015).
Because the nation wants to go from a low wage, high tax economy to a high wage, low tax society, the UK created a tax reform that cut millions of individuals out of income tax. The tax reform also lowered income tax for millions more. The nation wants to raise employment. Currently, the UK has hit its all-time high with employment. They are also focusing on the younger work force. The priority for younger workers is to secure work in order to gain experience. Thus, workers under the age of 25 are part of the tax reform (Gauke, 2015).
Lower tax society
Decreasing income tax and completely removing it for some people effects other aspects of the economy. Because of this, costs may increase for some business. Thus, taxes will be reduced for businesses. Furthermore, the government wants to reward working people by reducing their taxes. The government believes that any individual who works thirty hours a week on the lowest paying spectrum should not be subjected to income tax. The idea behind the government reform is to create a better tax system were people can get more of what they earn. This budget was established to protect lower income families while supporting working families by lowering their taxes. Therefore, individuals receive a higher income rather than low pay with a benefit system (Gauke, 2015).
Overall Analyze
The current UK tax system does not follow the canon of efficiency or economy. This principle states that the government should not seek high salaried individuals to tax, however, they do. The UK exempts lower income individuals from income taxes. Furthermore, the country gives tax breaks on working individuals. Thus, taxes are lower for everyone. However, this does not follow the canon of efficiency or the canon of equality. The canon of equality states that everyone throughout the nation pays proportional taxes to their income. Exempting low income people from income taxes does not follow the rules of equality.
It seems like the UK originally followed Adam Smith’s canons of taxation. The UK taxed everyone proportionally like the canon of equality states. However, over time the UK has rebranded their ideas of taxes. What the canon of equality did for the UK was create low wages and high taxes for its citizens. Due to this, the UK has gone through several reforms in order to flip the economy. They want their economy to consist of high income and low taxes for everyone throughout the nation. Since the tax reform in 2010, the UK has seen remarkable results. Employment levels are at an all-time high and more individuals are receiving more of the money that they earned. The economy boosted and has had remarkable results for its citizens. Thus, the UK discovered that the principle of equality did not work as well for them as Smith thought. The UK has seen results by doing the opposite; taxing only those who can afford it a minimal amount.
The UK taxes on consumer goods also does not follow the rules of equality. Certain goods and services are exempt from consumer taxes. Furthermore, luxury items are taxed more than needed consumer goods. The Value Added Tax fluctuates with the economy, making the tax affordable at all times. Similarly to income tax, not only are some items exempt from the consumer taxes, consumers only have to pay small amount of taxes on other items.
Conclusion
Taxation is an important part of any society. He helps pave the roads we drive on. There are four main principles when it comes to a good tax system. Those principles are: equity, certainty, convenience and efficiency. The Canon of equality states that the tax system should be fair and be proportionate throughout society. This is a major aspect to the tax system. The tax system should not be set up to tax someone too much or too little. The tax system also should not take more than they need. The UK follows the majority of the principles, however, the tax reform made certain aspects of tax unfair. Certain people are not taxed at all while others are. The amount these individuals pay is substantially less than when everyone was paying taxes. However, not taxing lower bracket individuals does not fulfil the principle of equality. The taxation throughout society is not proportionate. However, the UK has found a lot of success with this system. The UK’s economy is booming and is currently the fastest growing economy. At this rate, they are well on their way to increasing income while lowing taxes.
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