Direct taxes are charged on income, profits or other gains and are either deducted at source or paid directly to the tax authorities. The direct taxes payable by individuals are income tax, capital tax and inheritance tax, and the direct taxes payable by the companies is corporation tax. All of these taxes are administered by HM Revenues and Customs (HMRC), which was formed in April 2005 by the merger of Inland Revenue and HM Customs and excise. NIC (National Insurance Contribution) is also looked upon as form of direct taxation.
Indirect taxes are paid by the customer on the consumption of goods and services. It includes value added tax (vat), Stamp duty, customs duties and the excise duties levied on alcohol, tobacco and petrol. VAT is a proportional tax paid on all sales. Before passing the revenue on to HM Revenue and Customs, however, firms may deduct any VAT they paid on inputs into their products; hence it is a tax on the value added at each stage of the production process, not simply on all expenditure. The standard rate of VAT was 17.5% but now it has been reduced to 15% to bring stability in the economy.
Capital gain tax (CGT) is charged when an individual makes a disposal of chargeable asset. This disposal occurs when the asset is sold other than in course of trade, given away lost or destroyed. Individual resident is considered as chargeable asset according to U.K tax system. Companies are not chargeable persons. CGT liability for a tax year is based upon the chargeable disposal made by an individual during the tax year. First £ 9,200 is exempt from CGT. Rates of CGT are same as the rates which are applied on the saving income of an individual. The normal due date of CGT is 31 January following the end of the tax year.
The main occasion on which Inheritance tax (IHT) is charged when a transfer of chargeable property is made to a chargeable person in his lifetime or a transfer made on death. Lifetime transfer such as small gifts made on a marriage or civil partnership are partly exempt from IHT. Transfers made to transferees like (spouse, civil partners, charities) are exempt from IHT. The amount of IHT charged on the estate of a deceased person depends upon the size of the estate and the total of any chargeable transfers made in the seven years before death. IHT is payable within six months in which the transfer took place.
U.K resident companies include (clubs, societies, and other unincorporated association) who are charged corporation tax on the profit they make. It is charged in respect of accounting period which never exceeds then 12 months of accounting period.
In 1778, the Scottish moral philosopher and economist, Adam Smith, first published his now famous four basic maxims of taxation: certainty, convenience, administrative simplicity, and equity.
Self-assessment is the tax regime introduced by the Revenue in the mid-1990s - mirroring the systems already in place in the US and Australia. The system shifts the burden of administering tax affairs on to individuals. If you're worried that you may have been paying too much (or too little) tax the P60 tax form you receive at the end of each tax year (each tax year runs from 6 April to 5 April) will set out how much money you earned and what tax you paid.
The tax system should ensure that the tax charged to the individual or organisation is fair and is applied equally across the board. If the taxation system is considered to be unfair, it will not have public respect and the likelihood that taxpayers will resort to tax avoidance will increase. There are two forms of equity considered. Since in economics, "everything depends on everything else". Taxes will affect prices, rates of interest and so on. The question is who will actually end up being affected by a tax, either directly or indirectly? For instance, an increase in the tax on scotch will be partly suffered by scotch drinkers, but it might also be suffered by people involved in the production of scotch. The most obvious requirement of equity or fairness is to treat equal people in equal circumstances in an equal way. This is called preserving 'horizontal equity' If there is a reason for not discriminating between equals, then this suggests that should be discrimination between those who are not equal.
Efficiency is an important aspect of any taxation system which proves that it is working properly. In order to make any analytical progress, It is necessary to have a clear idea of efficiency and how an optimal allocation of resources if defined. It is then possible to use such criteria to judge how taxes might interfere with the efficient functioning of an economy. The UK tax system has evolved over many generations and is now used for purposes that go well beyond its historical function of raising revenue. It has been an economic tool to promote efficiency, a political tool to achieve redistribution of income and wealth, and a social tool to encourage welfare and development. Today society demands that it delivers fairness among our people and a competitive framework for our businesses. Apart from Tax system being efficient still incomes escapes tax by evasion, even though they are received in cash. Although by nature very little is known about it, "causal empiricism" suggests that evasion is widespread particularly in landlords, small-businessmen, and shopkeepers. The importance of tax evasion is due likely to effect on the allocation of labour, since other occupation which has the opportunity to evade tax a more likely than those which do not. Administrative and non-compliance both help to evade tax for individuals. There may be further economic distortions in the market where traders who evade tax to have a price advantage and some traders who pay full taxes. Another form of excess burden is to the traders who do not pay full taxes have the threat of uncertainty that they will be caught or not.
Certainty can be measured by the degree of easiness for the tax payer to calculate his/her tax liability. The tax code should be easy for the average citizen to understand, and it should minimize the cost of complying with the tax laws. Tax complexity adds cost to the taxpayer, but does not increase public revenue. For governments, the tax system should be easy to administer, and should help promote efficient, low-cost administration. Tax system should be accountable and easy for citizens, any changes in tax policies should be visible not hidden from tax payers. Changes in any tax policy should be publicized. Direct taxes have certainty and simplicity as the tax payer is well aware about what he has to pay annually. But with complex system of indirect taxes like VAT, excise duty it is arbitrary.
PART-B
Keynesian Theory is a macroeconomic theory based on the idea of the 20th century British economist (JOHN MAYNARD KENYES), that argues that decision taken by private sector sometimes leads to inefficient macroeconomic outcomes, and therefore advocate policies, monetary policies taken by the central bank and the fiscal policy actions by the government can help to stabilize the business cycle. Keynesian theory suggests that at the time of falling national income, government spending or reduction in taxes can motivate people to spend more and stabilize the economy, preventing the problems of unemployment. Increased taxation and government spending at the time of high national income might help to reduce inflation caused by excess demand. The multiplier effect which depends on the government spending to consume, If it consists of goods and services, then the normal multiplier applies, which is added to the tax multiplier gives a value of £1. The crowding out create the same problem of macro-economic management when the expansion of the public sector may result on lower increase in national income because it displaces some private expenditure. If the economy is operating at full capacity then any expenditure incurred by the public sector will crowd out at least same amount of private sector. Another assumption which can make an instantaneous effect by any tax changes are lags. It occurs when the timing of taxation levied on the business cycle is at the wrong time, or to the wrong extent which increases the problem rather than reducing it.
Monetarist approach believes that the economy is inherently stable because private sector expenditure functions are relatively stable and price adjustment will bring the economy back to potential output. There are two types of policies referred one is Expansionary policy which is used to combat unemployment in recession by lowering interest rates, and the second type is Concretionary policy which involves rising of interest rates in order to reduce inflation.
Fiscal policy; though fiscal policy includes both revenue and expenditure side of the government activity, but changes in the level of composition of taxation and government spending can impact on the following variable of the economy;
Aggregate demand and the level of economic activity.
The pattern of resource allocation
The distribution of income.
Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth.
The tax system has steadily become vast and complicated; It has doubled in length and has increased inland revenue administration spending from £1.6 billion to £2.8 billion. Even though the expenditure has increased but still experienced economic growth, the tax reform survey found that
60 per cent of firms were increasing their spending on tax planning and compliance with tax law. Only three per cent were decreasing spending.
78 per cent said that the level of tax complexity has increased over the last five years. Only 2 per cent said that it had decreased.
Conclusion;
It is clear that Britain's economic performance has been worsening over the last ten years and this has been the result of poor economic and taxation policies. Ordinary people and businesses alike have been buried under an increasingly onerous burden of taxes and regulations, while rising public spending has produced little improvement in infrastructure or the public services. International problems have exposed, rather than created, the weaknesses that seem likely to produce a recession.
BIBLIOGRAPHY / REFRENCES
BOOKS;
Simon James, Christopher Nobes, (2003), The Economics of Taxation, 7th Edition, Published by Financial times.
Alan Melville, (2009), Taxation: Finance Act 2008, 14th Edition, Published by Pearson Education.
Malcolm James (2005), The UK tax system: an introduction, Spiramus.
John Alexander Kay, Mervyn A. King, 1986, the British Tax System, 4th Edition, Published by Oxford University Press.
WEB;
tpa.typepad.com/home/files/gordon_browns_economic_failure_embargoed_00.01AM%20FRIDAY%2019%20SEPTEMBER.pdf
http://www.hm-treasury.gov.uk.
http://news.bbc.co.uk/1/hi/business/2966620.stm
http://65.55.33.119/att/GetAttachment.aspx?file=42d991cb-60e0-4f53-ac1d- =01_e3a3f&oneredir=1
www.taxation and the cost of capital the u.k experience.co.uk
