To understand whether or not tax is a necessity the first thing that should be looked at is what tax contributions are used for. One use and the most obvious one is to raise capital for all of the required expenditure, this includes things like health care, education, pensions, ect and on a local level things like local parks and even cleaning roads. However is the tax system really needed for this? Can’t the private sector provide these goods/services? One might argue that every individual should just account for themselves and pay for what they use individually but when this theory is really looked in to it becomes clear that most people couldn’t afford to do this because each person would have to pay the full fee of the service in question regardless of their ability to pay.
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Another aim of the tax system is to reduce inequality through the redistribute of income. When a progressive system is in use the relatively less well off are helped at the expense of the wealthy. If this system was not in place would people voluntarily help those less fortunate then themselves? However as human beings is there an obligation to help another? Maybe ethically there is a right and wrong answer but shouldn’t everyone be entitled to decide for themselves?
Taxes are also used to influence behaviour in an effort to correct market failure. In theory if markets are left to themselves the optimum level of output would not be produced therefore some may argue that forms of government intervention are needed, “there is often a positive correlation between real income per capita and the relative extent of government” (Slemrod, Gale and Easterly, 1995: 375). What the government decides is good may be exempt from taxes for example books where as goods such as alcohol and cigarettes are taxed heavily in an effort to make them less appealing, however this does not always seem to work effectively as most consumers remain undiscouraged. History has shown that over time the best methods/systems are copied, if this is the case how come the British tax system has yet to be copied by any other economy?
Demand management is another aim of the tax system. Some believe that during times of recession or depression the government has a duty to try and create the demand needed to resurrect the economy, “Thus, without intervention, there is locally too little activity in the economy” (Diamond, 1982: 889). The method behind this involves the government increasing spending and reducing taxes. The question that should be asked is, are there better methods for achieving this goal? Governments are not like businesses in the sense that they produce very few goods that can be sold, however taxation is not the only way government s can raise money, they can also borrow and fine for violations such as speeding for example but borrowing is not a long term solution and how much can really be raised through violations?
To summarise although unpopular as stated in the quotes given by Winston Churchill and J.B. Colbert, the evidence presented would suggest that some form is tax is a necessity. The current standard of living in today’s society demands it. The government must collect revenues to provide what citizens need and want.
Income tax is a progressive tax. Adam Smith (1776) suggested that this is a quality of a ‘good tax’ because it ensures equality however some may argue that a tax on earnings would violate an individual’s right to decide how to use the money he earns. One merit of income tax is the level of certainty associated, the person paying the tax is relatively certain as to how much he/she is expected to pay because tax rates are decided in advance. This is in line with Adam Smith’s (1776) principle stating that taxes should be certain and not arbitrary. Another merit is that income taxes are economical, the government doesn’t have to spend large amounts in tax collection as the tax can just be deducted at the source. Theoretically the people that make less pay less but in practise some people are able to avoid paying the full amount due or in extreme circumstances evade paying completely by being paid under the table, however this is considered unethical and illegal. The concept of income tax initially sounds productive, tighter controls wouldn’t hurt though, however this would be costly and may lead to more of a loss than a gain. Income tax can also be used as an anti inflationary device, for example when inflation is high the government can increase the tax rate which will affect the demand levels which will in turn reduce inflation but this may discourage people from working harder in order to earn and save more, “high marginal income tax rates appear to have a significant negative impact on income.” (Poulson & Kaplan, 2008: 58) Another advantage of income tax is that it does improve public consciousness because the tax payers become interested in how public funds are spent, however income tax can also be seen as an inconvenience for people because the appropriate evidence needed to support the income statements (their receipts) are distributed over the whole year where as payments are taken out as a few lump sums.
Capital gains tax can effect economic growth, when the tax rate is high investment will decrease however the opposite will occur when the tax rate is low, the benefit of this is that the government can therefore use capital gains tax to influence behaviour. “Capital gains tax has a significant influence on investors” (Dyl, 1977: 165). Another merit is that this form of taxation does promote equality as it is a tax on the profit made when an asset is sold, people making gains of £1 million a year will pay considerably more than individuals making gains of only £20000 per annum. “a Capital Gains Tax may be regarded as reducing inequality of wealth in much the same way as a progressive income tax system” (Staszczuk ,2001: 14). This tax can also be seen as fair because of its various exempt assets, this includes things like your car and personal possessions worth up to £6000. If these assets were taxed the wealthy would be less effected than the relatively less well off therefore with these exemptions in place some may view capital gains tax as reasonable.
One merit of inheritance tax is that it motivates charitable contributions because charitable donations are exempt from the tax and may also reduce the rate of tax that is paid. This motivation would be diminished if inheritance tax was abolished. However some may argue that death isn’t the most appropriate time to impose a tax. Another benefit is that this tax is in line with the equity principle where by a person is taxed according to his/her ability to pay introduced by Adam Smith (1776) because any estate valued at less than £325000 pays no tax. The main aim of this form of taxation is to reduce inequality through the redistribute income and wealth, however some have argued that inheritance tax does the complete opposite “the estate tax may increase inequality of income and wealth” (Stiglitz, 1978: 137).
A merit of value added tax is the level of horizontal equality associated, everyone that buys a certain product has to pay the same level of VAT and if a person spends more on those products they pay more VAT, in a way giving people choice. However this does not meet the criteria for vertical equity because the burden is relatively greater for the less well off as they spend a higher proportion of their disposal income on the same goods/services. “VAT would be regressive” (Caspersen and Metcalf 1994: 731). Another merit is how this type of tax can be used to influence behaviour for example if there was a high VAT on petrol consumption of this in theory would fall, this technique could be used for the greater good of the economy, however if the VAT was set too high it could just lead to inflation and maybe even a decrease in the standard of living. Value added tax is also efficient as the cost of collection is minimal because collection takes place automatically when goods/services are bought and sold, Adam smith (1776) suggested that this was a principle of a “good tax”. This method of collection also makes tax evasion very difficult.
To conclude all four types of UK taxes discussed seem to have many merits but also disadvantages, it would be difficult to determine the overall impact to society however the evidence collected does suggest these forms of taxation are beneficial.
Slemrod, Gale & Easterly, JS, WG & WE, 1995. What Do Cross-Country Studies Teach about Government Involvement, Prosperity, and Economic Growth?. Brookings Papers on Economic Activity, vol 2, 373-431.
Diamond , PD, 1982. Aggregate demand management in search equilibrium. The journal of political economy , vol 90, 881-894.
Poulson & Kaplan, BP & JK, 2008. State Income Taxes and Economic Growth. Cato Journal, Vol 28, 53-71
Dyl, ED, 1977. CAPITAL GAINS TAXATION AND YEAR-END STOCK MARKET BEHAVIOR. The journal of finance, vol 32, 165-175.
Staszczuk, OS, 2001. Capital Gains Tax: The pros and cons . FMF Monograph , vol 28, 1-34
Stiglitz, JS, 1978. Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence. Journal of Political Economy, vol 86, 137-150.
Caspersen & Metcalf, EC & GM, 1994. IS A VALUE ADDED TAX REGRESSIVE? ANNUAL VERSUS LIFETIME INCIDENCE MEASURES. National Tax Journal, vol 47, 731-746.
Book with one author
Smith, AS, 1776. An Inquiry Into the Nature and Causes of the Wealth of Nations. 1st ed. Harvard University: A. and C. Black, 1776.