- August 29, 2012
- Posted by: essay
- Category: Free essays
Today, fiscal policies of the Government influence substantially the development of business. Monetarists stand on the ground that with the help of effective fiscal policies and monetary regulation of economy, the Government can direct the economic development of the country and encourage the economic growth (Volti, 2005). At the same time, it is worth mentioning the fact that specialists (Ponzi Â and Koenig, 2002) view the British tax system as effective, although, there is a debate concerning the use of income tax and its possible substitution by the personal expenditure tax. In fact, the debate over advantages and disadvantages of the income tax and the personal expenditure tax. In such a situation, the Government of the UK has to define its further fiscal policies, which apparently need consistent changes in response to the economic recession which have already affected the national economy consistently. At the same time, the Government also needs to take into consideration the fact that the income tax has already proved its efficiency since it has been used since the late 1940s as one of the main source of revenues to the state budget. Therefore, today, the UK Government needs to balance the fiscal system, including the income tax in order to make fair and more efficient than it is at the moment.
On analyzing the current tax system of the UK, it is important to lay emphasis on the fact that there are two major approaches to the national fiscal policies. On the one hand, there is the income tax, which provides over 40% of the state budget of the UK, while, on the other hand, there are spending taxes, which provide less than 40% at average within the last decades (Volti, 2005). In such a way, it is obvious that the US tax system heavily relies on the income tax and spending taxes, among which it is possible to single out the personal expenditure tax, which is suggested to substitute the income tax (Sim and Killough, 1998). It proves beyond a doubt that, at the present moment the UK tax system is mainly oriented on the income tax as the main source of revenues to the state budget.
In such a situation, it is obvious that the radical change of the taxation system, including the replacement of the income tax by the personal expenditure tax, is likely to undermine the structure of taxes in the UK that puts under a threat the stability of revenues of the state budget.
What is meant here is the fact that some specialists (Volti, 2005) warn that the total replacement of the income tax in the UK will lead to a considerable deficit of the state budget because the replacement of this tax will lead to the consistent reduction of the state budget revenues.
In this respect, the negative impact of the replacement of the income tax by the personal expenditure tax is explained by the effect of both taxes on the national economy and behaviour of tax payers.
To put it more precisely, a priori the income tax is focused on taxation of income of taxpayers. At this point, it is possible to refer to the Table 1 which reveals the fact that the number of income taxpayers has increased steadily since the early 1990s. This means that the Government can count for a larger number of people who are able to afford paying this tax and, if the positive trend persists, the revenues of the state budget from the income tax will keep growing. At the same time, the Table 2 shows that the percentage of earning the British pay in terms of the income tax, does not exceed 22.0 ”“ 23.3 % of their total earnings. Moreover, married people and families with children have lower tax rate and they have to pay a smaller percentage of their earning in terms of the income tax and, for these categories, the income tax constitutes about 19% of their earnings.
In this respect, it is worth mentioning the fact that critics of the income tax (Chenhall, 2003) argue that the income tax in the UK does not mirror the actual level of revenues of taxpayers. In other words, the income tax is unjust since it does not take into consideration the full difference in the level of incomes of the British.Â As a result, the rate of taxation of people with high and relatively low level of income does not vary substantially. Therefore, they pay practically equal rate of their earnings in terms of the current income tax. Obviously, such an approach is unjust, especially in the context of the current economic recession, when the middle class faces a threat of the gradual but substantial decrease of its income, while representative of upper classes are not supposed to increase their income tax payments that allow them keep their spending high, while the overwhelming majority of the British, including the middle class and especially lower class, has to cut their spending substantially.
In such a situation, some specialists (Viardot, 2001) suggest the introduction of the personal expenditure tax, instead of the income tax. At this point, it should be said that the current economic trends and the growing gap in spending of the upper class, on the one hand, and the lower and middle class, on the other, is the main reason which pushes the replacement of the income tax by the personal expenditure tax. In fact, the point is that the expenditure tax will mirror the actual financial opportunities of the British and, some specialists (Chenhall, 2003) believe that this tax will be fairer compared to the income tax. It proves beyond a doubt that the personal expenditure tax aims at the taxation of spending of the British. Consequently, to put it in simple words, this means that the more an individual spends the higher tax he or she will pay in the personal expenditure tax, while people who are forced to save and decrease their spending will pay less respectively to their decrease in spending.
At first glance, such an approach and change of the taxation in the UK seems to be just and logical. Obviously, it is quite natural that taxpayers who cannot afford paying higher taxes without significant harm to their financial position should pay higher taxes, while people who are forced to save on essential products, should be deprived of fiscal pressure, they are vulnerable to under the existing fiscal system. In such a way, the supporters of the replacement of the income tax by the personal expenditure tax stand on the ground that the rich has to pay more, while the poor has to pay less. In addition, the personal expenditure tax will define the rate of the taxÂ by personal spending of people that means that, potentially, the British can save on the personal expenditure tax, if they cut substantially their spending.
However, the optimistic view on the replacement of the income tax by the personal expenditure tax does not really take into consideration the nature of the taxes and their impact on the national economy. In this respect, it is important to stress the fact that the income tax is mainly focused on the income of taxpayers. Therefore, the higher tax rate will decrease the income of the British, while the lower will increase it and, thus, it will improve the economic position of taxpayers. Consequently, in the current situation, it would be more logical for the UK Government to change the tax rates and to ease the fiscal pressure on the lower and middle class decrease the income tax rate for them, while the income tax rate for the upper class, i.e. the rich, should increase to cover potential losses in the state budget revenues, which would naturally result from the reduction of the income tax rate for the middle class.
The aforementioned change of the income tax is particularly prospective and consistently better than the replacement of the income tax by the personal expenditure tax. In this respect, it is possible to the nature and effects of the personal expenditure tax. In fact, the personal expenditure tax aims at the spending of the British. Consequently, the introduction of the personal expenditure tax, instead of the income tax, will discourage spending because taxpayers will attempt to save their money by means of the personal expenditure tax. In addition, it is necessary to take into consideration the current economic situation since, today, taxpayers tend to decrease their spending even without any additional taxes on spending. However, the decrease of spending slows down the economic development and, thus, aggravates the economic crisis even more. In such a situation, the introduction of the personal expenditure tax will discourage the economic development because of the further drop of spending. From the monetarist point of view, such fiscal policies is apparently erroneous since it is important to balance spending and savings in order to ensure the steady economic development. Moreover, in the time of economic crisis, the Government should stimulate spending to revive the national economy.
Thus, taking into account all above mentioned, it is possible to conclude that the replacement of the income tax by the personal expenditure tax in the UK is inappropriate, at least today. The reason is obvious ”“ the national economy would not afford the ongoing decrease in spending since, today, the national economy needs to increase spending, which allows to increase revenues of companies and to revive the economy. However, the personal expenditure tax will discourage spending and head the national economy to a deeper economic crisis. At the same time, the national economy needs to ease the fiscal pressure, which naturally occurs, if the income tax persists since the decrease of income naturally leads to the decrease of the income tax, even if its rate remains unchanged. At this point, the Government should rather diversify the income tax rate respectively to the level of income of taxpayers, rather than replace the income tax, which has worked perfectly well for decades, by the personal expenditure tax.