Governments also rely heavily on price elasticity of demand when imposing taxes and setting minimum or maximum prices. Whilst determining PED it is essential to take into account the determinants of price elasticity of demand. These include the number of substitutes and the closeness of them, the period of time taken for consumers to find substitutes and the proportion of income spent on goods. The elasticity of a product will fall into five types of elasticity; perfectly elastic, relatively elastic, relatively inelastic, unit elastic or infinitely elastic. Governments place taxes such as excise and indirect taxes on goods that have price inelastic demand this creates tax revenue for the government and was created so that the consumers paid majority or all of the tax of the product.
All the different kinds of taxes which are a result of a number of principles constitute the country's tax system. It is developed with regard to the taxation challenges. Depending on the country the tasks may be different, because it depends on a country's economic conditions, economic policy. However, the main task of charging taxes is the same everywhere – to get state revenue which is necessary to pay its costs (public administration, national security, education, health, transfer payments). Taxes may also be a measure of stabilization of state fiscal policies impact on the economy.
In order to answer this question, Meade (1978) pointed out that we need to have in our minds main desirable characteristics of a tax structure as economic efficiency, distributional aspects, international aspects, flexibility and stability, transitional problems, and simplicity and cost of administrative compliance. Alm (1996) suggested a systematic way to start to analyze by emphasizing that analysis of taxation requires balancing the trade-offs between equity, efficiency, and revenue-yield and while designing tax system. As any decision for tax rates is surely a choice among alternatives, this choice affects the distribution of tax burden on individuals (equity), and the net yield of tax collection after subtracting administrative and enforcement costs from gross tax revenues(revenue-yield), and leads to change in decisions and behavioral responses of individuals and firms (efficiency), (Alm, 1996, p.125). One tax system can be defined as more efficient than another if it can raise the same amount of revenue with a smaller loss of welfare across the society as a whole. Harberger (1964) addressed that this kind of distortions induced by taxes in economic decisions lead an additional cost to taxpayers and society and reduce social welfare.
The objective of this tax is to finance a government expenditure on the welfare of the country like construction of roads, dams, road lights etc. What is Rationalization? Rationalization is a process in which restructure a process to increase the efficiency of the system. In tax rationalization means that restructuring of the tax policy through which the efficiency of the policy can be increased. This restructuring can add or remove some steps in the policy through
Therefore, the firm's actual transaction to record its income tax liability is the basis for the amount of the income tax expense reported on the Income Statement. The allocation method is a bit different. The actual amount of tax that is paid in the year is ignored when it comes to reporting income tax expense on the Income Statement. The amount of income tax expense reported on the Income Statement is based on the on the income tax rate that the firm pays, which is applied to the amount of pretax income. This makes the Income Statement perfectly consistent with the before-tax income.
The horizontal equity remotes to the fact that people in the same financial situation are able to pay taxes on the same basis and should be charged the same rate. Meanwhile, the vertical equity proposes that individuals in diverse financial situations have different abilities to pay taxes, so the charges sho... ... middle of paper ... ...e final income, shortening the difference between rich and poor. In general, it can be said that the tax system in the United Kingdom attempts to reduce inequality and poverty, although it is seen by many as an unclear and unfair system. Tax scams and other avoidance measures are symptoms of a wider malaise in a regime that need to be more transparent and fairer (Telegraph View, 2014). However, for those in lower pay employment, its effectiveness can be seen through the income tax, which will deduce between 10% and 20% of their final income, compared to 40% to 50% of those in higher pay.
A GOOD TAX SYSTEM Defining Tax A tax, as defined by the Taxation UWI text book, is a legal obligation to pay a certain percentage of income or profits to government imposed on taxpayers, that is, any person or organization required by law to pay tax. Legal penalties would be forced upon taxpayers for failure to make tax payments. Characteristics of a good tax system A Tax System, according to the online Free Dictionary is “a legal system for assessing and collecting taxes”. For a country to progress through their collection of taxes it must entail a good tax system. According to Adam Smith’s The Wealth of a Nation, he noted four main characteristics of a good tax system namely: (1) Taxes imposed must be equitable; (2)A Tax System should
I will then move to discuss the value of the optimal tariff imposition. As well as discussing the first best argument, I will also look at the value of second best arguments, examining whether or not tariffs do always cause a net welfare loss. A tariff requires the importer to pay a given fraction of the world price to the government. This protects domestic producers by raising the world price well above the domestic price; this of course has a downside for the consumers. A tariff works like a tax from the consumer's perspective: there are transfers from the consumers to both the government in the form of revenue and to the producers in the form of higher profits.
• Government spends money on the economy, providing goods and services such as health care and education to firms and households. This is an injection into the circular flow of income. The Government in return levies taxes on households and firms in order to pay for the goods and services. This is a leakage from the circular flow of income. The government is able to spend on the factor market in return for the four factors of production which allows the government to make the public goods and services available.
Tax avoidance involves entering into transactions with the aim of reducing tax levied to minimum amounts. Transactions, for instance, signing for saving schemes; retirement plans that are not taxable are used by individual and organizations in tax avoidance. Tax avoidance measures are within correct legal precincts and are permitted by laws. In tax avoidance, income expected can be postulated and received and is due for taxation. However, before taxation is applied, the person or organization avoids tax payment through devices that reveal the finance as diverted whereas making it to exist for use by the individual or company (Agrawal, 2006).