Essay on taxation system | Essay about Tax

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Meaning of Tax:

The word  tax came from the Latin word taxo which means- "I estimate" . Tax  is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. A tax may also be defined as a "pecuniary burden laid upon individuals or property owners to support the government , A payment exacted by legislative authority."

Taxes consist of direct tax or indirect tax,

The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. In modern taxation systems, taxes are levied in money. Tax collection is performed by a government agency such as Canada Revenue Agency in Canada, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK and Incometax Department in India.

Discussion:

Income tax has always been making a significant impact on any country’s economy. Very high or low income tax does not necessarily mean to aid economy of any country. An optimum income tax rate depending upon country’s economical, social goals is necessary in order to realize the real benefits of income tax. I would like to support my views on this topic in following paragraphs.

First, income tax is a key driver for any country to grow and provide sufficient facilities to its citizens. If there is no income tax in the country then it is very difficult to fund the systems like army, police, industry and agriculture, which are backbones for any country’s economical growth. For example without having police in the society it is almost impossible to protect citizens and provide necessary security for the industries from stealing their products. In absence of police, various industries will have to hire their own security, which will negatively impact on the industries performance since they have to spend lot of money on the security. Same thing with the army; in absence of army it is impossible to protect the people from outside enemies in case of war or terror attacks. Thus in order to have smooth functioning of all the systems mentioned above there must of some income tax posed on countries citizens all over the world.

However, imposing higher taxes does not necessarily mean strong economic growth. If there is very high income tax for example, consider in extreme case 90-100% tax imposed on people then many people would not like to work, because they might think that all of their earnings go into the income tax then the people might want to do other activities for example selling drugs or agricultural products illegally. This will harm country’s economy badly as well as people will indulge in negative activities which will make country’s reputation spoiled. On the other hand, if there is very less income tax for example 0-1% then all of the earnings of the people will be with them. In this situation, the government may not be able to fund key systems as described above. Also, government will not have sufficient money to build infrastructure, transportation systems required for the people.

But it is also important for the government to provide some subsidiaries on the income from specific products for example, solar panels; wind turbines in order reduce negative impact on earth’s environment and also stimulate economy by importing and exporting these products.

Overall, income tax plays paramount role on any country’s economy. But very high or low tax rate does not enhance the economy, an optimum income tax rate is essential for country’s potential growth.

Tax Classification:

Consumption tax can be classified into indirect tax levied on consumption. Indirect tax depending on whether the consumer is limited to certain taxable goods and services can also be divided into separate tax and general excise tax.

Consumption tax is levied on individual or group of specific goods, and the items subject to taxation are not uniform in a particular tax rate.

This taxation method applies classifications on different levels, and considers tax on the grounds of importance, items such as alcohol and tobacco products have deterrent taxes imposed on them (sin tax).

While, basic food related products are treated as essential, thus do not entail heavy taxation. The primary principle of consumption tax pertains to the power of deferral. Criticism levelled at sales and consumption taxes is based on the argument that the two tend to transfer the tax burden to the low income earners.

Consumption tax, a kind of indirect tax was invented by Maurice Laure of the French finance ministry. A mechanism that focuses on trade of goods and services arising in the Value-Added Tax, VAT, or GST (Goods and Services Tax, Excise Duty).

General consumption tax can be divided into value-added tax and consumption type VAT by the method of calculating income-type VAT. The former is calculated at the time of deduction of capital goods, suppliers are not allowed depreciation; the latter is fully deductible and for capital goods, only a fraction of taxable consumption.

General excise tax and individual tax are somewhat similar, the general excise tax is also an element of criticism, and is associated with the alternative tax, such as direct income tax and corporation tax .

The general consumption tax for luxury goods was once considered a form of excise tax imposed on individual goods. A number of economists and tax experts prefer consumption taxes as compared to income taxes for economic growth. Consumption taxes tend to be indifferent in relation to investment. Based on execution and existing conditions, income taxes can either promote or disfavor investment.

In the main, national tax systems are considered to discourage investment and the consumption tax could contribute to boosting the capital stock, productivity, and the economy.

General Consumption Tax (general expenditure tax) is the method proposed by British economist Nicholas Kaldor. Originally conceived as a tax to supplement the income tax by collecting taxes in the form of tax expenditure from income and capital gains, interest rates and savings.

Examples for direct taxes are taxes on net worth, income taxes, death duties, and gift taxes. Indirect taxes are taxes which are not charged on and collected from those who are intended to accept it. These taxes will not take individual consider circumstances. Examples for indirect taxes include excise taxes, sales taxes, and value-added taxes. Taxes can also be categorized based on their effect on the distribution of wealth. This classification includes proportional taxes, progressive taxes and regressive taxes. A proportional tax is one in which the burden of tax imposes equally on all taxpayers, unlike progressive taxes and regressive taxes. In a progressive tax the rate of tax will increases as your earning increases. That means individuals who earn more incomes have to pay greater proportion of their incomes as the tax. In a regressive tax the rate of tax will be high if your earning is less. Sales tax is often called as regressive taxes so as to make them compare feebly with income tax in terms of their fairness. Sales tax is tied to consumption rather than income. So that individuals and families having low-income should pay a greater proportion of their incomes as sales taxes. So we can say that sales tax is regressive which is unfair. 

Where Tax Expenditure go:

It is of importance to note that taxes in the society are spent on the following government functions:

· National defense.

· Law enforcement, freedom, and public order.

· Protection of human rights.

· Country’s infrastructure and local services 

· Government operation and effective functioning.

· Educational system in the society.

· Healthcare, pension, unemployment systems.

· Energy, waste and public transportation systems 

The United States taxation involves regular payments to 4 major levels of the US government:

1. local government (including municipal, town, district, county). This government is financed by property taxes (permits, fees, parcel taxes, fines, income tax, gross payroll, sales tax, etc).

2. Regional entity (schools, utility districts)

3. State governments

4. Federal governments