Fairness in Taxation theory Essay Example | Topics and Well Written Essays - 1250 words

Fairness in Taxation theory - Essay Example In 1949, the income tax rate was 50 Percent. Ideally, there was not fairness because every person paid tax on equal tax rates irrespective of how much a person earned. However, when Income and Corporation Act 1970 was enacted in 1970, it improved distribution of tax burden among different income groups. Tax rates were divided into lower rate, basic rate, higher rate, and addition rates depending on the levels of income earned by individuals. On the other hand, corporate tax rates were categorized into small profit rates, small profit upper limit rate, marginal relief limits and the main rate. Categorisation of tax rates for individuals and corporation brought some fairness in the tax system. Brederode (2009) define fairness to paying tax according to ones ability. It should also be based on the benefits (public goods/services) a person or corporation receives from the government. Fairness in taxation means that all people are treated equally without discrimination. Furthermore, Adam Smith defined fair taxation as a progressive tax system. Progressive tax system imposes greater tax burden to the rich as compared to the less rich. Therefore, a person or entity pays tax according to the amount earned and public goods consumed. If a person or entity earns more income or uses more of a public good, tax burden imposed on them also increases. However, fairness varies over time and is highly subjective. According to Adam Smith, statistics indicated that affluent (rich) people often benefit more with economic expansion. Therefore, because benefits accrue more to the richer when there is economic development and expansion; it becomes natural that they pay more tax to support a government that delivers the public goods and services to them. In addition, a large corporation uses more of public good than a small corporation uses and should be taxed more. Furthermore, concerning income tax on individuals, non-domiciled citizens are required to pay taxes on income earned in f oreign country to pay for the benefits he or she received when growing or residing in the original home country. The importance of fairness in taxation Fairness in tax administration is critical. This is because fairness plays a critical role in influencing tax payers behaviours and attitudes. First, fairness in taxation is an indication of distributive justice. When taxpayers feel that the tax burden has been distributed fairly, they are likely to voluntarily contribute their taxes. Therefore, tax enforcement agencies will not increase their surveillance or increase their sanctions to make taxpayers comply. Consequently, will people behave fairly if the tax system treats them fairly and the cost of surveillance or sanctions will be reduced significantly. Secondly, it reduces uncertainties. Taxpayers normally feel anxious about taxes that they pay. However, if they perceive that taxation burden has been applied fairly, their anxiety or uncertainties reduce significantly and are able to concentrate on productive activities. Thirdly, fairness legitimises the tax system. Unfair taxation system may result in psychological reactance in taxpayers and may lead to opposite and retaliatory actions or behaviours. This is because people will perceive unfair tax system as illegitimate and are more likely to evade and avoid taxes. This may result to fewer taxes collects and increased administrative costs. b) Fairness in the 2010/2011 UK’