UK Taxation



UK Taxation

Taxation

Taxation is a set of rules as in when it should be paid, who pays the tax to whom and how much is the tax to be paid. Taxation is a process or means by which the ruler increases income to settle the required expenses of government, through its law-making body. Defined in another way, it is a method of allocating the expenses of government among those who are privileged to have the benefit of its facilities and must, therefore, bear its load.

Purpose of Taxation:

The idea of taxation is to generate profit for government expenses. One of the most important uses of taxes is to generate profit for public goods and services, such as street cleaning and street lighting. Public services and goods does not permit a defaulter to be excluded, or permit elimination by a consumer, there can no market in the good or service exist if it is not financed by some entity, and so the financial assistance by the government is to be given, which are likely to finance themselves largely through taxes collected from those individuals who fall under the category of 'tax payer'. Government financial functions are not possible without taxation (Donaghy, 1997).

Apart from this, taxation can be a powerful means in order to attain the objectives of economic development and the goals of social progress. Local industries may be defended through taxation by enforcing high customs duties to foreign goods. Moreover, taxation can also be used to decrease inequalities or inequities in income and wealth by progressively higher taxes as in the case of estate and income tax. So based on the earlier premises, it is clear that taxation is certainly the lifeblood of the state, without which the existence of the state will be put to danger.

In its simplest form, the primary purpose of any tax is to redistribute the wealth of a country. This underpins the fundamental principle of taxation, which is to finance Government expenditure, and is the method by which the government collects funds and then uses this money to better the economy and country as a whole. Through taxation, the government attempts to achieve the five macroeconomic objectives, which are:

* Sustainable economic growth

* Low unemployment

* Price stability

* Equitable distribution of wealth and;

* External balance.

Upon first inspection, UK taxation is amongst the lowest in the developed world. The four principles of an effective tax system as described by Economist Adam Smith are equity, economy, certainty and convenience. It is the role of the Government to devise a taxation system that meets these four principles (Donaghy, 1998).

New Taxation System

The current tax system in the UK has separate rates for taxing earned income, dividends, interest and capital gains. It has a personal tax allowance that is less than the amount required for a person to house, clothe and feed themselves. It has tax bands that increase tax in steps from 10% to 50%, the steps being uneven in size and income ...