Table of Contents
Introduction
The term ‘tax’ can be defined in the context of various elements. The OECD (2010) defines it as the revenue collected from profits, income, social security as well as goods and services among other resources. Taxes as the share of a country GDP are an indicative measure of a country’s economic output. In another aspect, the taxation influences the extent to which government controls its jurisdiction. Taxation is the process by which a sovereign country collects revenues to defray government expenditure (Bird & Zolt, 2003). The taxation system collects the share of corporate and individual income under the authority of the law.
The traditional approach to tax policy has fundamentally been based on securing resources to run the public sector. This is done with the sole objective of ensuring there is the efficient, equitable and sustainable mode of taxation. However, in the end, political factors feature prominently in determining the taxation system. The appropriate taxation system is also influenced by the administrative and economic environment. Tax revenue for a province like Independencia for the lifeblood of the envisaged contact between the citizens is vital to promote development and maintenance of infrastructure and provision of social welfare of the province’s residents. The current work provides the possible framework for goods tax in the administrative province of Independencia in the country of Unidad, which can adapt to the domestic and international circumstances of the central European nation. The nature of the taxation system ll is reflective of the important aspects of the communities in the province and the political system, which is socialist.
There is no single taxation system to meet the requirement in every country (Bird & Zolt, 2003). However, an efficient taxation system is determined on account of the economic structure and the capacity to administer taxes and the needs of the public service (Bird & Wilkie, 2012). The tax ratio, which is the share of the relative tax GDP, tends to be higher in countries with abundant natural resources revenues and are determined by the income levels in a country.
A brief overview of Unidad and the Province of Independencia
The taxation system in place influences citizens’ motivation to work, save, invest and spend. The taxation system is composed of different taxes, value-added tax, income tax, excise tax, property tax, corporate tax among other forms of taxes that together are used by the government to maximise tax revenue and to meet government needs to promote a sound environment for economic and social growth for a jurisdiction (Bird & Wilkie, 2012). The design and development of a taxation system enable the achievement of the policy objectives in the economic and political environment facing a given country such as Unidad. In Independencia Province, the economy is reliant on agriculture and mining. These activities form the bedrock of taxation. The country has a socialist form of government that commits to provide free social services such as basic education and medical care.
Due to the high level of literacy in the province of Independencia, there has been a steady growth in the human capital, particularly the newly established call centre. The human capital is strategic due to fluency in several European languages in the central European country. Although the country relies on agriculture and mining as its economic backbone, the landlocked status of Independencia mean that big proportion of export and imports moves through the road network. With a population of 10 million, Independencia relies on the road transport to feed its population; this leads to concerns about the level of pollution in the era of global warming and climate change.
The ageing population also means that the taxation system must support a larger proportion of the population of aged and ailing citizens, with a shrinking working population. However, the young population that could serve as the driving engine of the Independencia are moving out of the province to complete their studies; this implies that a taxation system targeting the working class are not adequate to meet the Province’s social and economic needs (Bird & Wilkie, 2012). Therefore, there needs to be a thorough overhaul in the taxation to correspond to the current state of the country. Mining and agriculture will be the main target of the taxation system. Besides, the taxation system must address the growing need to adopt cleaner and sustainability in the road transport by introducing an environmental tax system that restricts pollution and development of technologies for environmental friendly cleaner transport system.
For a jurisdiction like Independencia, in the country of Unidad, with human capital resources, agricultural as well as mining resources, the taxes should generate a semblance of meeting the territory needs such as prevention of water and air pollution and provision of basic social amenities such as education and health. The taxation system will thus be distributed equitably such that all the wealth of the province contribute to the primary purposes of the government
Principle of Taxation and Theories
The taxation framework consists of three basic principles which are the ability to pay principle, the equal distribution principle and the benefits principle. The equal distribution principle states that the income, transaction, and wealth should be taxed at a fixed percentage such that individuals who earn more and buy more should not pay more taxes or should not pay higher taxes. The benefit principle holds that individuals are taxed in a portion of the benefits they receive from the government. This implies that individuals who receive direct benefit from the government are eligible to be taxed such as security, health, education, infrastructure among other government services (Bird & Wilkie, 2012). The ability to pay principle dictates that taxes should be linked to individual’s income or measure of wealth such that they can afford to pay. Higher tax rates are subjected to individuals with higher income or wealth in the individual income tax (Castañeda, 2017). The taxation system should adhere to the basic principles of a sound tax system that promotes compatibility with the economic goals, equality justice when imposing a tax, fiscal adequacy and the tax system administrative feasibility.
The taxation system should not be inconsistent with the economic goals of the country. For example, Independencia seeks to reduce air and water pollution. This implies that the tax system should not promote the activities that contradict the overall economic goal of reducing air and water pollution. Coal energy production should be taxed more while renewable energy such as wind and solar promoted through tax reliefs. The fiscal adequacy principle of a sound tax system implies that the tax base should be able to meet the expanding or shrinking government expenditure. Independencia seeks to cut down on pollution; the expenses that the government intends to use to meet this goal should be well covered irrespective of the challenges in the economic adjustments, trade balances, and other factors. The theoretical justice of an effective taxation regime will ensure that imposed taxes are defined by the ability of the individual or corporate citizen to pay (Castañeda, 2017). In an effective taxation regime, the taxes should not be ambiguous such that they are easy to enforce and convenient to pay promptly without imposing an unnecessary burden on businesses.
The structure of the taxation regime should be proportional to the amount of income an individual earns or the profit generated by a corporate. The taxation system should not be regressive such that it suffocates the means of creating wealth in Independencia such as means of transport, mining or agricultural activities. Ideally, the taxation regime should be progressively seeking to promote increased exports in agricultural activities and mining. In the promotion of clean energy, a regressive environmental tax that seeks to promote the use of renewable energy should be promoted. Industries that employ environmental measures to mitigate pollution should be provided with tax incentives to promote these activities. Imports of material and resources for setting up renewable energy facilities such as solar and wind energy should be offered tax relief as a form of incentives to make them less expensive and affordable.
For Independencia provincial authority to meet the government expenditure plan, three forms of tax classification can be imposed on the individual and corporate subjects. These include, according to the determination of account, according to the subject, and according to who bears the burden of the tax regime. In respect to the burden bearer of the tax, there is a direct tax and indirect tax. Direct taxes are imposed directly on an individual income tax while the indirect tax is imposed by services or goods bought. Under the subject matter, Independencia authorities may introduce a property tax, excise taxes, and capitation tax such as residence tax. According to the determination of account, there can be specific taxes for certain goods or services. In the province of Independencia, specific taxes can include on coal energy and taxes that seek to promote fuel-efficient cars on Independencia roads.
Factors to consider when deciding the taxes to introduce in Independencia, Unidad
There is a range of factors that People First Party should consider when deciding which taxes to introduce. The taxation regime should be practical and specific to the economic goals of the jurisdiction. The administrative and economic perspectives of the taxes being introduced should be considered first. For agricultural-based countries, some aspects of the activities are ‘hard-to-tax’ such as informal and small business. The tax system is thus oriented to international trade (import and exports). However, in the age of trade liberalisation, there is an extent onto which international trade can be taxed. Independencia can expand its tax system to meet its expenditure projection through taxes on wages and personal incomes as well as increase taxes on corporate taxes on their profits and value-added taxes. These measures are aimed at expanding the tax base without putting a strain on the administrative capacity for enforcement or discouraging the growth in these sectors of the economy (Burman & Phaup, 2012).
However, the People First Party should consider that the political and economic contexts exerts an effect on the design and implementation of the taxation system. The implementation of the taxation system is a political phenomenon more than an economic decision. Tax policy do not happen in a vacuum since there are salient considerations of the emerging issues that need to be considered (Castañeda, 2017). The tax system must reflect the complex, economic, social and political interactions in a jurisdiction and the different groups within it. Also, the province administrative capacity should be contextualised in the tax system. Policymakers and the People First Party should be well versed that the taxation regime is not just a means of financing the government, but a visible component of their social contract with the electorate and citizen of Independencia. Taxes imposed by the government are complied with due to the citizen perception of the government as credible and legible and are willing to support its economic goals to govern and develop resources (von Haldenwang & von Schiller, (2016). Then taxation is an exercise of political legitimisation exercised by the jurisdiction and its citizens. Public finances must inextricably be transparent and accountable for a citizen to perceive the taxes as fair.
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Globalisation is influencing the taxation regime since tax systems do not operate in isolation, especially in the age of trade liberalisation (von Haldenwang & von Schiller, 2016). Globalisation has created an economic environment where capital flows across boundaries, and there is a great mobility of business inputs and also affects production and consumption patterns. In the era of globalisation, national or even provincial boundaries do not hold significance. There has been considerable loss of sovereignty for individual countries or regions in making taxation decisions. Taxes have become an inalienable factor in deciding the location of the business. Investors will be wary of regions which impose high taxes without any unique benefits they possess over other locations. The tax system has become a front for competing for portfolio investment (Liu & Altshuler, 2013). The People First Party should focus on making Independencia a favourite investment decision due to an attractive tax portfolio. This should be against a shrinking tax base as a citizen do not return to the province, following their adventure for higher education. The tax regime should not act as a barrier to trade and investment in the region. Policymakers at Independencia should consider the emphasis that WTO has placed on the reduction of import and export taxes to promote trade liberalisation across the globe.
Most OECD countries have trade taxes that account for not more than 3% of the total tax revenue (OECD 2010, Leblanc et al., 2013). There should be a relative pressure on corporate tax in the agricultural and mining industries to fast-track the adoption of greener technology to mitigate against water and air pollution since the sectors together with transport are the leading emitters of greenhouse gases in Independencia. However, with changing business operations where production is disseminated in different countries, it becomes harder to locate the source of corporate income. This makes it harder to determine the appropriate corporate tax without running the risk of capital flight from the region due to favourable tax regimes in other countries.
The mobility of capital due to advancement in technology makes it challenging to impose value-added taxes. For instance, electronic commerce makes it possible for the seller to increase sales without being physically present in Independencia. The digitised product makes a collection of income and VAT taxes rather difficult. People First Party and other stakeholders must design and implement a tax system that counters the changing world of business efficiently while avoiding incessant double taxation of its individual and corporate citizens. They should make a delicate balance between the taxes that are imposed and the goal of still maintaining Independencia as a favourite destination for business and investment.
In the event where the government must cope with less revenue due to a shrinking tax base, as experienced by the increasing migration of young people in search of education, raising revenue remains the only option for financing government spending and maintaining the public infrastructure. The taxes that need to be raised must align with the broader economic and fiscal policies of the region. The development of the taxation systems must be guided by effectiveness and fairness, efficiency, simplicity, certainty and neutrality (Engida & Baisa, 2014). The taxes that policymakers at Independencia seek to develop must be neutral and equitable to all business activities in the region, such that they can spur economic growth while meeting the government spending plans (Engida & Baisa, 2014). The neutrality of the tax system ensures that there is efficiency even when there is a deadweight loss arising from price triggers due to changes in supply and demand in the absence of the tax. The tax neutrality ensures there is no favouritism across the economy since taxes are raised indiscriminately (Engida & Baisa, 2014). The same forms of taxation should be implemented across the board to all forms of businesses whether mining, transport or in agricultural activities in the region. Areas that undermine the specific sustainability of the economy such as pollution should also be addressed in the taxation system.
The cost of compliance should be as minimal as possible. This cost overs the administration of the government. Moreover, the tax regimes should have certainty and simple for a typical taxpayer to understand it and consequently oblige to tax requirement. Certainty helps the business community and individual taxpayers to plan accordingly and make optimal decisions that are not in conflict with tax obligations (Keightley & Sherlock, 2014). Where the taxation system is complex, there is a likelihood of aggressive tax planning that may lead to deadweight losses in the economy (Keightley & Sherlock, 2014). The taxation system should be flexible and dynamic to keep up with dynamism in the business activities such the expanding electronic commerce. The flexibility of the taxation system ensures that it can meet the changing needs of the government. The structural features of taxation system in the Independencia province must keep up with the commercial and technological advancement in the economy.
The equity in the taxation system is envisaged to occur on two main fronts, the horizontal and vertical equity. The horizontal equity in the taxation ensures that individuals and corporate citizens in similar circumstances bear the same burden of the tax. The vertical concept of tax burden dictates that taxpayer in better economic circumstances should bear more tax burden. The vertical equity in the taxations system is applied in the income tax, where higher income earners pay more tax as a proportion of their gross income earnings. The percentage of vertical equity in a taxation system will vary from tax jurisdiction to another depending on whether the government want to reduce the income variation the country/region (Keightley & Sherlock, 2014). Ultimately, the taxation system decisions lie with the People First Party that is mandated by the people to set the taxation system that will reflect e wider economic and social policy of the administration.
The province of Independencia can impose taxes on both income and expenditure. Consumption taxes that are usually in the form of value-added tax are levied on expenditure consumption of goods and services (Burman & Phaup, 2012). These taxes will be deducted at the point of transaction. The income tax is levied over a given income period from the source of the income while the consumption taxes are usually levied at the place of destination. VAT is, for example, is levied during the exchange of goods or services at the retail point of sale (Burman & Phaup, 2012). Consumption taxes have been defined by OECD as the taxes paid in respect to the enjoyment of consumer goods and services. They can be broad based, for example value added tax, retail sales tax and the wholesale tax. Narrow based consumer tax include excise duties on some special goods and services, for example levies on wines or plastics to meet certain economic or social goals. Under the narrow based classification of consumption taxes, there is vice taxes. Tax regimes should not rely heavily on consumption to raise internal revenue since they can lead to high commodity prices that ,may distort consumption patterns and make the economic less attractive due to low consumer purchasing power.
It is critical to note that tax burden is not always borne by the legal persons required to oblige to the tax (LeBlanc, Matthews, & Mellbye, 2013). Due to the phenomena of price elasticity as a result of factors of production, there is a shift of the tax burden. Independencia should also include corporate income tax that is levied on a broad tax base and is a constituent of the normal return equity capital. Usually, corporate income tax is imposed on corporate return on equity capital. The corporate income tax is assessed in two approaches which include the balance sheet system and the receipts-and-outgoings system. The balance sheet method also referred as net-worthy comparison approach is calculated by comparing the value of the net assets of a firm at the end of the tax period with the value of the net assets in the balance sheet at the beginning of the tax period (LeBlanc et al., 2013). The profit and loss method (receipts-and-outgoings system), determines the amount of tax from differences between the recognised income derived by the corporate activities in a given tax period minus the expenses incurred over the same tax period.
The tax system must be elastic, weighted by the elasticity of an individual taxes corresponding to the proportion of the total taxes raised by a tax (Heider & Ljungqvist, 2015). For instance, the progressivity of the personal income tax rate structure corresponds to the elasticity of the personal taxes. Ideally, consumption taxes are the most elastic since they cover transaction in goods and services that are rapidly growing rather than excise taxes on traditionally growing goods. These goods are levied based on price rather than the quantity purchased. In another instance, property taxes increases are dependent on how regular the property is valued (Heider & Ljungqvist, 2015).
Taxes can be viewed as a channel for transferring resources from the private sector, individual and corporate, to public service. Taxes should not be a constraint on the resources available for public or private use and the administrative costs for collecting taxes should be as minimal as possible and justifiable such that they do not reduce fund for other public initiatives. However, it should be noted that taxes can impose economic costs in the form of the excess tax burden and deadweight losses that reduce the number of resources available to the public and private entities. The cost is as a result of the decision made by both individuals and corporate business being influenced by the tax regime in place. Taxes can be assumed to be a form of economic rent payable to induce an economic activity. However, appropriate taxes that can be imposed on natural resources such as mining rights in Independencia can generate revenue for the government without distorting the economic activities. Other taxes that the policymakers can introduce such environmental levies on vehicles that are not fuel-efficient and non-renewable energy can be beneficial by spurring economic growth in other sectors such as renewable energy sector.
Conclusion
In conclusion, taxes are levied to finance government expenses and to change the orientation of the economy. Some probable taxes such as environmental tax can help reduce water and air pollution in the province. The design of the taxation system should be delicately balanced to ensure the change in economic behaviour is not such drastic to cause efficiency losses. The People First Party must find ways of manoeuvring through the economic challenges such as the economic and social plight of young people in search good education and employment in other regions by installing a tax regulation mechanism that encourages citizen to return. Fairness in the tax regime should be prominent to spur growth in all sectors of the economy to create a robust economy, which will, in turn, attract more capital flow.
The People First Party government should adopt a consistent approach in tax legislation such that investors can plan their spending around this regime. This avoids the deadweight losses to the economy. Inconsistent with the taxation system makes it difficult for corporates to plan their activities responsibly in consideration of their tax obligations. The taxation system should also be attractive to the flow of foreign direct investment and also promote inward investment of the existing business in the Independencia. The government must play a delicate balancing act that promotes a progressive economic environment, while sourcing for revenues to spur growth and promote sustainable economic activities. The province must remain international and regionally competitive to attract and retain capital and at the same time meet the needs of the electorates by providing basic social amenities such as education and medical care. Professionalism should be the main backbone in tax planning to insulate the economy from unfair and inequitable taxation regime that can choke growth and lead to unintended losses in the economy.
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