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Sample Paper: Economics_-_Necessity_of_taxation.doc


This essay looks into the necessity of the taxation system in all governments. Composed of 1500 words, it evaluates the concept of taxation as well as its importance in the United Kingdom as well as in other countries. Although the taxation system has provoked a lot of criticism from the population, it has established stable economic growth in the country developing into among the most developed economies.

All governments have expenses. They need a source of revenue to finance their expenditure. Taxation has been the source of revenue to run governments for many years. Taxation is the inherent power of a government to demand persons, properties, to contribute some fee for the purpose of generating revenues for public use. All local authorities including local governments, municipal governments, provincial and county corporations have the mandate to impose taxes on citizens.

The taxation rates, values and regulations differ from one country to another with their complexity depending on the country’s rules and regulations. The laws also determine who pay the taxations and what percentage of income should be deducted. The government imposes charges on citizens as well as corporate entities. Although taxes fund public services, it has always attracted contempt from citizens who view the system as confiscation of their income by the government.

Necessity of taxation
Taxation is the key source of revenue for any government. The policies involved in taxation are critical in the financial and economic development of a country. Taxes finance the government costs and expenses in raising revenue for the government to promote people’s welfare, regulate property and equally distribute wealth in the nation. Taxation, through imposing custom duties, protects locally produced goods against competition from imports. It can also be a form of protection for new and upcoming industries through tax exemption. Evading or partially paying taxes attracts penalties which could either be civil or criminal (Finney 2004, p712).

Taxation in the United Kingdom (UK) compels the citizens to pay to at least two government levels. These are the local and central governments. The UK treasury use taxation as the main source of revenue (James 2009, p 166). Most of the UK government spending goes to financing of education, social security and health.

Taxes in the UK can either be direct or indirect. Direct taxes directly impose deductions on the citizen’s income. Direct taxes include inheritance, capital gains, insurance, corporation, business rates, stamp, council rates and income taxes. Intermediaries are involved in the collection of indirect taxes upon consumption of a product or service. Indirect taxes include value added tax (VAT), petroleum revenue tax and levies on specific goods and aggregates. According to the UK law, a tax year begins on 6th April and end on 5th April the following year (Broe 2008, p 886).

This is an exceptionally high dosage of taxation that strains the citizens of this substantially developed country. Such economic burden induces criticism as well as resistance from the UK population. Critics view the taxation policies in the UK as costly and inequitable. In addition, UK’s taxes are not competitive enough. A decent tax system should be fair and efficient (Gillespie 2007, p336). Income tax is a direct tax that is imposed on all UK citizens on their source of income. All working people in the country should pay income tax. The government uses the department of Revenue and Customs to collect income tax. People pay their taxes based on their income in a tax year. Not all income is taxable. The taxable income is taxed to a certain threshold. Tax payers can have exemption on certain amount of income. This is known as personal income. The percentage of taxing rate on taxable income is prone to change each tax year.

One of the advantages of income tax is that the taxpayer is certain of the exact amount to pay. This is because tax rates are decided and can be calculated in advance. The government can also estimate with accuracy the amount of revenues to expect from income tax. This assists the government in adjusting its income and expenditure. Income tax is imposed fairly to all working citizens. Persons in the same economic situations are taxed at the same rate (James 2011, p 57). Those at different economic situations are taxed at different rates. This makes income tax policy to have both horizontal and vertical equity. Income tax is also elastic. A taxpayer’s income tax increases with the increase in their income (Ault 2010 p, 329). This elasticity is essential for the government as it can also increase its revenue by increasing the amount of income tax. Such an increase in income tax will also increase the revenues.

Income tax provokes public awareness on how public funds are spent. Income tax creates a direct burden on taxpayers creating more awareness about the rights and responsibilities of the working UK population. Imposing income tax is economical. The government of the UK does not spend much in the collection of the tax as the tax is deducted straight from the source of income including individual salaries. The policy of income taxation can help the government in controlling economic inflation. During an economic depression and inflation, the government is able to increase the tax rate (Jane 2009 p. 117). Increase in tax rate reduces the consumption demand which in turn will reduce inflation.

Capital gains tax (CGT) is the charge imposed on a taxpayer on a capital gain basis. It is part of the income tax. Capital gain is the profit that one gets following the sale of an asset whose initial buying price was lower than the final selling price. Only the profit is subject to tax and not the whole amount of the selling price. The type of investment and holding period of an asset determine the capital gains tax. Capital gain tax is subject to tax. Capital gains tax does not apply to personal property worth £6,000 or less. The government of UK allows some annual exemption on the capital gains. The rate is prone to change depending on the tax year. Capital gain tax is beneficial for the UK government as it can use the income from taxing profits to reduce income tax rates. Tax on profit or capital gain assists citizens to pay down deficit without having to sell assets. Since cutting on income does not offset deficits or debts, tax on capital gain can deal with a deficit. Capital gain tax helps to grow the economy.

Inheritance tax is the tax imposed on things left behind when someone dies. When the deceased estate and property is worth more than £325,000, tax is imposed. Exemptions are allowed or property worth less than £325,000. It is the tax which arises when one becomes a beneficiary of a dead person property. Inheritance tax enables the government to collect less tax from the working population when the total amount of revenue required is fixed. Imposing taxes on a property or income discourages it (Kamal 2011, p96). The UK government is able to discourage inheritance of property by use of inheritance tax and encourages working for money.

Value added taxes are the charges levied on most goods and services. It is the tax imposed on value added to a product or material from the hand of the manufacturer to the final consumer. UK also charges goods and services that European Union (EU) states import. VAT rates are three and they depend on the type of services that a business provides. The rates are; standard, which charges 20%; reduced charging 5% and zero that charges nothing. VAT is based on value added and not on price of a commodity so it has no effect on the price. It is not easy to avoid VAT due to its catch up effect (Johnson 2010 p 212). This type of taxation is transparent, efficient and has an insignificant effect on the population as it only collects in small portions at different levels of production.

Recommendations and conclusion
The government should try to make the tax system less complicated and less costly. The main role of a tax system should be to raise revenue for public use. An efficient tax system should impose taxes on the population according to their ability to pay. Taxable capacity of an individual should be based on a person’s income as well as property. It should not be discriminatory between individuals and social groups.

The tax system in UK tax system defines how competitive the country is to investment and growth of business. The government controls the tax system making the system prone to a relative change in the taxation process. An excellent tax system is the one, which is bases on a set of rules and principles. A tax system should cater for both the taxpayer and authority’s interests. Tax is necessary for all countries as the revenue-collected help in building schools, roads, hospital among other infrastructure. Without taxes, no country will develop.

Andrew, L., John, H (2002). The international taxation system. Boston: Kluwer Academic Publishers.p 213
Ault, H. (2010). Comparative income taxation : a structural analysis. Alphen aan den Rijn, The Netherlands Frederick, MD: Kluwer Law International Sold and distributed in North, Central and South America by Aspen Publishers. P 329
Broe, L. (2008). International tax planning and prevention of abuse : a study under domestic tax law, tax treaties, and EC law in relation to conduit and base companies. Amsterdam: IBFD. P 886
Finney, M. (2004). UK taxation for students : a simplified approach. London, England: Spiramus Press Ltd. P 712
Gillespie, A. (2007). Foundations of economics. Oxford New York: Oxford University Press. P 336
James, M. (2009). The UK tax system : an introduction. London: Spiramus. P166
James, M. (2011). Taxation of small businesses. London: Spiramus Press. P 57
Jane, M. (2009). Understanding social security : issues for policy and practice. Bristol, UK Portland, OR: Policy Press. P 117
Johnson, D. (2010). International business : themes and issues in the modern global economy. Milton Park, Abingdon, Oxon New York, NY: Routledge. P 212
Kamal, S. (2011). Individual tax residence : the law and practice relating to the residence of individuals for the purposes of UK tax, with source material and a commentary on the UK-India Double Tax Treaty. London: Sweet & Maxwell. P 96
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