Question

16 MARKS

"Taxes are a necessary evil to raise revenue for the government, towards funding expenditure on 'public goods and services'. We should aim to do this in the most effective and efficient way - with the lowest marginal tax rates, and lowest distortions possible. This could be achieved by eliminating all forms of taxes on income and replacing them with a uniform tax on expenditure on goods and services instead."  

Provide a critical assessment of this statement based on concepts presented in this course and any wider reading you have done.

Answer 1

The following solutions are given below:-

‘Taxes are a necessary evil to raise revenue for the government, towards funding expenditure on 'public goods and services’.Taxes refers to the imposition of mandatory levies on people or entities by governments. Taxes square measure levied in virtually each country of the globe, primarily to boost revenue for state expenditures, though they serve different functions also.

Efficient Taxation

A tax transfers resources from the personal to the general public sector, then inevitably imposes a true loss on the personal sector, going aside any like regardless of the tax income finances. however most taxes can cause additional damage than that as a result of they usually drive a wedge between the value a client pays for one thing and also the quantity the vendor receives—which could forestall some dependent trade. burdensome labor financial gain, as an example, implies that the price to Associate in Nursing leader of hiring somebody exceeds what the worker receives.

A employee could also be willing to just accept employment that pays at least $100 an leader willing to pay (no additional than) that, however imposing tax on the wage can stop this trade from happening. This welfare loss from taxation over and higher than the loss from the direct transfer of real resources out of the personal sector is thought as dead weight loss (or excess burden) and is what economists have in mind once they speak tax distortions. (In the instance higher than, as a result of the employee isn't employed, no tax is paid, however the dead weight loss remains positive).

Efficient tax style aims to reduce these losses, whose size depends on two main factors. First, losses square measure larger the additional responsive the assets is to taxation. Suppose for example that the demand for a worker’s labor is totally dead, which means that associate degree leader is willing to pay any value for the worker’s services. Then, with a 20% tax rate, as within the example higher than, the worker would receive $100, however the employer’s value would be $120. the worker is employed, and there's no distortion. However once one aspect of the market has another to the dealings being taxed, distortions arise, and therefore the easier it's to exercise that different, the larger the distortion. And this can be true (given a number of additional assumptions) whether or not it's selections like hiring that square measure full of the tax or selections to avoid or evade tax. Second, the loss will increase over proportionately with the rate. Adding a distortion, the upper rate, is additional harmful once there's an oversized distortion already in place.

Two prescriptions for economical tax program follow: tax at the next rate things in non resilient demand or provide, and tax as several things as attainable to stay rates low. each of those principles need qualification—because in some cases following these general rules will have adverse consequences.

Taxing a decent whose demand is non resilient, as an example, can have very little result on the amount of that sensible demanded, however it leaves less to pay on alternative merchandise, which might result in giant changes in alternative markets.

Another set of qualifications arises from externalities— positive effects and negative effects on those not concerned within the underlying selections. Environmental injury, like temperature change, is that the leading example. Here a corrective tax could also be caught up. The corrective tax, additionally referred to as a Pigovian tax.

Lowest distortion,bearing, and sharing, the burden

The one that ultimately bears the important burden of a tax might not be the one de legally answerable for remitting payment. For example, within the example on top of, once the demand for labor was dead mounted, the $20 loss was suffered by the leader, not the worker—and that may be true in spite of that one was de legally answerable for creating the payment to the government. This illustrates too the final principle that the burden of a tax—its effective incidence—falls additional heavily on the aspect of the dealings with the smallest amount elastic response—that is, the one that finds it harder to shift out of the activity being taxed.

These implications area unit usually unnoticed. Take the present outrage over the little quantity of company tax paid by several transnational firms. firms don't seem to be individuals, and solely real people—shareholders, workers, customers—can pay taxes.The talk over company tax makes very little sense inconsiderately of United Nation agency extremely gains once the effective rates area unit low.

Fairness in taxation is usually a significant issue, with two main dimensions. Vertical equity issues the treatment of these with completely different incomes. The impact of a legal system on this dimension depends on its progressive—that is, however apace the share of financial gain taken by tax will increase with the amount of financial gain. Horizontal equity holds that those that area unit altogether relevant respects identical ought to be treated identical.

Each of those ideas is a smaller amount easy than it should appear. Clearly individuals have completely different views on the suitable degree of changeableness. however individuals may additionally disagree, for example, on whether or not changeableness ought to be assessed in terms of annual financial gain—a pretty absolute amount of measurement—or lifespan income. A consumption tax could look regressive relative to annual financial gain however abundant less therefore relative to expenditure, which can be a more robust indicator of Associate in Nursing individual’s lifespan financial gain.

Collecting Taxes

The contrast between evasion (illegal) and rejection (legal) isn't as clear-cut because it could sound—highly paid tax lawyers pay abundant time testing the excellence. Each area unit major issues altogether countries. There area unit challenges here for each the planning of taxes and their implementation. On the policy aspect, tax incentives to encourage specific activities, for example, only too usually offer opportunities for evasion.

Tax administrations area unit on the battlefront within the fight against failure to pay taxes. It helps to create things simple for those that merely need to pay no matter is due, by writing tax rules that area unit simple to know (though simplicity in tax style is troublesome to attain, given the vary of objectives and circumstances to be covered) and simple to search out. (Roman emperor Caligula’s tax rules were created public solely in tiny kind and in an ungainly place.) Ultimately, the trick for tax administrations is to make sure that the likelihood of police investigation noncompliance—and the penalties that follow—is high enough to encourage compliance whereas supporting and reflective widespread temperament to follow the principles. And a decent tax administration should do all that whereas minimizing each its own expenses (administration costs) and people of taxpayers (compliance costs).

Sometimes the assorted objectives mentioned purpose within the same direction—for example, once tariffs (taxes on imports) area unit replaced by a consumption tax at an equivalent rate. The switch leaves the value of imports to customers unchanged, however will increase income (because the tax is currently additionally collected on domestically sourced sales) and improves potency by reducing trade economic policy however such instances area unit rare.