Ease of administration and compliance

In discussing the general principles of taxation, one must not lose sight of the fact that taxes must be administered by an accountable authority. There are four general requirements for the efficient administration of tax laws: clarity, stability (or continuity), cost-effectiveness, and convenience. Administrative considerations are especially important in developing countries, where illiteracy, lack of commercial markets, absence of books of account, and inadequate administrative resources may hinder both compliance and administration. Under such circumstances the achievement of rough justice may be preferable to infeasible fine-tuning in the name of equity.

CLARITY

Tax laws and regulations must be comprehensible to the taxpayer; they must be as simple as possible (given other goals of tax policy) as well as unambiguous and certain—both to the taxpayer and to the tax administrator. While the principle of certainty is better adhered to today than in the time of Adam Smith, and arbitrary administration of taxes has been reduced, every country has tax laws that are far from being generally understood by the public. This not only results in a considerable amount of error but also undermines honesty and respect for the law and tends to discriminate against the ignorant and the poor, who cannot take advantage of the various legal tax-saving opportunities that are available to the educated and the affluent. At times, attempts to achieve equity have created complexity, defeating reform purposes.

STABILITY

Tax laws should be changed seldom, and, when changes are made, they should be carried out in the context of a general and systematic tax reform, with adequate provisions for fair and orderly transition. Frequent changes to tax laws can result in reduced compliance or in behaviour that attempts to compensate for probable future changes in the tax code—such as stockpiling liquor in advance of an increased tariff on alcoholic beverages.

COST-EFFECTIVENESS

The costs of assessing, collecting, and controlling taxes should be kept to the lowest level consistent with other goals of taxation. This principle is of secondary importance in developed countries, but not in developing countries and countries in transition from socialism, where resources needed for compliance and administration are scarce. Clearly, equity and economic rationality should not be sacrificed for the sake of costconsiderations. The costs to be minimized include not only government expenses but also those of the taxpayer and of private fiscal agents such as employers who collect taxes for the government through the withholding procedure.

CONVENIENCE

Payment of taxes should cause taxpayers as little inconvenience as possible, subject to the limitations of higher-ranking tax principles. Governments often allow the payment of large tax liabilities in installments and set generous time limits for completing returns.

Economic goals

The primary goal of a national tax system is to generate revenues to pay for the expenditures of government at all levels. Because public expenditures tend to grow at least as fast as the national product, taxes, as the main vehicle of government finance, should produce revenues that grow correspondingly. Income, sales, and value-added taxes generally meet this criterion; property taxes and taxes on nonessential articles of mass consumption such as tobacco products and alcoholic beverages do not.

In addition to producing revenue, tax policy may be used to promote economic stability. Changes in tax liabilities not matched by changes in expenditures cushion cyclical fluctuations in prices, employment, and production. Built-in flexibility occurs because liabilities for some taxes, most notably income taxes, respond strongly to changes in economic conditions. A more-active approach calls for changes in the tax rates or other provisions to increase the anticyclical effects of tax receipts.

Some economists propose tax policies to promote economic growth. This approach may imply a qualitative restructuring of the tax system (for example, the substitution of taxes on consumption for taxes on income) or special tax advantages to stimulate saving, labour mobility, research and development, and so on. There is, however, a limit to what tax incentives can accomplish, especially in promoting economic development of specific industries or regions. An emphasis on economic growth implies the need to avoid high marginal tax rates and the tax-induced diversion of resources into relatively unproductive activities.

Tax haven

A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.

Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.

States that are sovereign or self-governing under international law have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties.

There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens.^[2] Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.^[3] According to other definitions,^[4] the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.

Incentives

There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies.

Many industrialized countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. Various pressure groups also claim that money launderers also use tax havens extensively, although extensive financial and KYC regulations in tax havens can actually make money laundering more difficult than in large onshore financial centers with significantly higher volumes of transactions, such as New York City or London. In 2000 the Financial Action Task Force published what came to be known as the "FATF Blacklist" of countries which were perceived to be uncooperative in relation to money laundering; although several tax havens have appeared on the list from time to time (including key jurisdictions such as the Cayman Islands, Bahamas and Liechtenstein), no offshore jurisdictions appear on the list at this time.

A very interesting incentive was Inland Revenue and HM Customs and Excise agreeing to sell more than 600 of their building stock to a firm in a tax haven. The sell-off, was made to Bermuda based Mapeley Steps Ltd in 2001.

Modern trends

The development of taxation in recent times can be summarized by the following general statements, although allowance must be made for considerable national differences: The authority of the sovereign to levy taxes in a more or less arbitrary fashion has been lost, and the power to tax now generally resides in parliamentary bodies. The level of most taxes has risen substantially and so has the ratio of tax revenues to the national income. Taxes today are collected inmoney, not in goods. Tax farming—the collection of taxes by outside contractors—has been abolished, and taxes are instead assessed and collected by civil servants. (On the other hand, as a means of overcoming the inefficiencies of government agencies, tax collection has recently been contracted to banks in many less-developed countries. In addition, some countries are outsourcing the administration of customs duties.)

There has also been a reduction in reliance on customs duties and excises. Many countries increasingly rely on sales taxes and other general consumption taxes. An important late 20th-century development was the replacement of turnover taxes with value-added taxes. Taxes on the privilege of doing business and on real property lost ground, although they have persisted as important revenue sources for local communities. The absolute and relative weight of direct personal taxation has been growing in most of the developed countries, and increasing attention has been focused on VAT and payroll taxes. At the end of the 20th century the expansion of e-commerce created serious challenges for the administration of VAT, income taxes, and sales taxes. The problems of tax administration were compounded by the anonymity of buyers and sellers, the possibility of conducting business from offshore tax havens, the fact that tax authorities cannot monitor the flow of digitized products or intellectual property, and the spate of untraceable money flows.

Income taxation (of individuals and of corporations), payroll taxes, general sales taxes, and (in some countries) property taxes bring in the greatest amounts of revenue in modern tax systems. The income tax has ceased to be a “rich man’s” tax; it is now paid by the general populace, and in several countries it is joined by a tax on net worth. The emphasis on the ability-to-pay principle and on the redistribution of wealth—which led to graduated rates and high top marginal income tax rates—appears to have peaked, having been replaced by greater concern for the economic distortions and disincentives caused by high tax rates. A good deal of fiscal centralization occurred through much of the 20th century, as reflected in the kinds of taxes levied by central governments. They now control the most important taxes (from a revenue-producing point of view): income and corporation taxes, payroll taxes, and value-added taxes.

Yet, in the last decade of the 20th century, many countries experienced a greater decentralization of government and a consequent devolution of taxing powers to subnational governments. Proponents of decentralization argue that it can contribute to greater fiscal autonomy and responsibility, because it involves states and municipalities in the broader processes of tax policy; merely allowing lower-level governments to share in the tax revenues of central governments does not foster such autonomy.

Although it is difficult to make general distinctions between developed and less-developed countries, it is possible to detect some patterns in their relative reliance on various types of taxes. For example, developed countries usually rely more on individual income taxes and less on corporate income taxes than less-developed countries do. In developing countries, reliance on income taxes, especially on corporate income taxes, generally increases as the level of income rises. In addition, a relatively high percentage of the total tax revenue of industrialized countries comes from domestic consumption taxes, especially the value-added tax (rather than the simpler turnover tax). Social security taxes—commonly collected as payroll taxes—are much more important in developed countries and the more-affluent developing countries than in the poorest countries, reflecting the near lack of social security systems in the latter. Indeed, in many developed countries, payroll taxes rival or surpass the individual income tax as a source of revenue. Demographic trends and their consequences (in particular, the aging of the world’s working population and the need to finance public pensions) threaten to raise payroll taxes to increasingly steep levels. Some countries have responded by privatizing the provision of pensions—e.g., by substituting mandatory contributions to individual accounts for payroll taxes.

Taxes in general represent a much higher percentage of national output in developed countries than in developing countries. Similarly, more national output is channeled to governmental use through taxation in developing countries with the highest levels of income than in those with lesser incomes. Indeed, in many respects the tax systems of the developing countries with the highest levels of income have more in common with those of developed countries than they have with the tax systems of the poorest developing countries.

List of sourses

1. Matveeva, Tatyana. Kinds of Taxes - Moscow, 2007

2. Cobham, Alex. “ The Tax consensus has failed!”. The Oxford Council on Good Govermance, 2007

3. Ross, Michael, L. "Does Taxation Lead to Representation?". UCLA Department of Political Science, 2007

4. The New Palgrave: A Dictionary of Economics, 4 vol. (1987, reissued 1998),

5. Richard A. Musgrave and Peggy B. Musgrave , Public Finance in Theory and Practice , 5th ed.

Date: 2016-01-14; view: 845