Category: taxes

“Giving the government its due” is the basis behind most systems of taxation since it is through the collection of various corporate, custom and income taxes that a government is able attain the necessary funds in order to continue to operate. It is due to this that a lot of aspects of a person’s income can be taxed whether it comes in the form of income tax, corporate taxes, or even a tax on wealth. While most individual’s have no problem in paying taxes since they directly benefit from the amenities and services provided by the government (i.e. paved roads, a police force, government loans etc.) some individuals with a higher degree of attained income or rather a high degree of accumulated wealth often develop the notion that since they don’t benefit as much from government services due to the comforts that their wealth provides then they shouldn’t “pay as much into the system” so to speak (Otusanya, 2011: 316 – 321). This is where off-shore tax havens enter into the picture, such countries act as a means of by-passing government regulations of taxable wealth by acting as placed where undeclared monetary assets can be hidden discreetly and above all anonymously by various wealthy patrons (Hampton & Christensen, 2011: 169 – 175). Places such as Switzerland, the Maldives and even some Third World countries with low tax rates act as places where hidden wealth is transferred and stored in order to avoid the scrutiny of other governments (Workman, 1982: 675) (Shaxson, 2011: 8 – 32). The inherent problem with this particular practice is that it in effect denies governments access to funds that they otherwise could have used in order to pay for particular services that could benefit a lot of people (Arestis & Caner, 2010: 229 – 244). It must also be noted that this practice isn’t limited to just a few million dollars but rather constitutes billions of dollars of hidden wealth that has been sequestered into various unnamed accounts over the years (Shaxson, 2011: 24 – 27). In fact some banks in Switzerland and the Maldives actually pride themselves as being locations where the wealthy can choose to hide their wealth from prying eyes (Shaxson, 2011: 8 – 32). Of course this particular practice is highly illegal and if caught most tax evaders will wind up paying either stiff fines or have to endure jail time as a result of their actions (Keeler, 2009: 21). It must be questioned though why financial institutions in such tax havens allow such an illegal practice to continue. In this scenario money is the main motivator with millions or even billions in hidden wealth acting as means of increasing a bank’s funds enabling it to invest into various loans and endeavors which boosts the overall gains they accumulate (Keeler, 2009: 21). Based on this alone, it is highly unlikely that changes to prohibit or limit the practice will originate from such banks or within the countries they are in at the present. Rather what is necessary is an internationally concerted effort in preventing such a practice from continuing since it in effect denies people access to government services they would have otherwise received if tax evaders actually had a sense of moral decency when it comes to paying “what’s right” (Treasure islands Uncovering the Damage of Offshore Banking and Tax Havens, 2011: 576).

Examining the concept of “Regulation” for offshore tax havens

The inherent problem with the concept of regulation is that while it minimizes and controls certain actions it doesn’t outright abolish it. In the case of offshore tax havens the practice should be abolished immediately since they in effect promote tax evasion and the sequestering of hidden wealth (Barrett, 1997: 12). The inherent problem though in implementing this particular method of international banking reform is that based on international law a state has sovereignty over all actions within its borders (McGlinchey, 2009: 23 – 24). Furthermore, the theory of Realism in international relations explains that only states are the primary actors within an international system and cannot be dictated by an outside entity. What this means is that international organizations that seek to reform the banking system cannot demand an offshore tax haven to change its laws and regulations which control its banking industry due to a state’s inherent sovereignty and the fact that international organizations are not the same level of power as a state when it comes to issues in the realm of international action (Rawlings, 2007: 1 – 66). The only way of actually implementing such a change is if an internationally concerted effort by a coalition of states or rather a state with sufficient international influence such as the U.S. demands a change since such a practice negatively affects them (Dagar, 2010: 82 – 85). As the theory of Realism goes on to explain, the interaction of states within the realm of international relations is in effect dictated by “power relations” wherein stronger states (i.e. states with economic or military might) can in effect dictate/control the actions of other states by asserting their military or economic advantage. This particular strategy can be accomplished by either a single strong state or a group of small states however the effect is still the same. In the case of offshore tax havens a certain degree of international action by states is required (such as the threat of trade restrictions or economic sanctions) in order to in effect convince the governments of such tax havens to change their banking policy in terms of greater transparency in order to prevent international tax evasion from occurring (Bartram, 2007: 11 – 12).

Connection between Globalization, Off-shore tax Havens and the Financial Crisis

Globalization has in effect allowed the faster flow of capital from one international location to another however as a direct result this has enabled tax evaders to hide their wealth in other countries which actually contributed to the financial crisis (Palan, Murphy and Chavagneux, 2010: 13 – 24). What must be understood is that one of the main causes behind the financial crisis was that banks became unwilling to lend money to businesses due to their exposure to toxic subprime debt which affected their capital (Poole, 2010: 421 – 435). Compounding this problem was the subsequent out-flight of monetary assets by various consumers who became afraid that several banks may collapse the same way that Lehman Brothers did during the onset of the financial crisis (The Great Financial Crisis: Causes and Consequences, 2009: 41). With millions of dollars in effect being transferred to offshore tax havens this caused the already stringent policies of banks to become even more closed off due to the out-flight of capital which caused the financial crisis to worsen even more (Martin, 2011: 587 – 618). It was only when the U.S. government intervened with a bailout package that banks were able to gain sufficient capital to start lending once again (Yandle, 2010: 341 – 255). Based on this situation it can be seen that even though globalization has made it easier for capital to be transferred from one location to another in order to facilitate any manner of financial transaction this has actually introduced a certain degree of vulnerability to various banking institutions due to the possibility of capital out-flights to various tax havens which are considered a “safe” place to store money during times of economic uncertainty (Alloway, 2008: 125 – 141) (Martin, 2011: 587 – 618). Another way of looking at this problem is from the perspective of capital and how it affects a bank’s lending policies. If a bank has a sufficiently high level of capital due to good investments and high deposit rates this in effect enables it to lend to local businesses and communities which in effect contributes towards improving the local economy (Alloway, 2008: 125 – 141). Wealthy depositors contribute to this system by increasing the overall capital of banks which allows them to loan even more money. In cases though where people with high degrees of wealth choose to practice tax evasion by utilizing off-shore tax havens this in effect denies local banks the high levels of capital needed to loan money at low interest rates. In effect the practice of offshore tax havens contributes to the deterioration of local economies since banks either become unwilling to lend due to a low degree of capital or implement high interest rates on loans which affect the ability of local businesses to function properly (Crotty, 2009: 563 – 570). This particular scenario was seen in the aftermath of the 2008 financial crisis wherein despite the bailouts provided by the government there was still a certain degree of hesitance on the part of banks to lend due to the continued out-flight of capital which reduced their ability to actually loan money without placing themselves at significant risk due to the possibility of loan defaults as a result of the economic downturn. From a certain perspective it can be stated that if offshore tax havens didn’t exist then the sudden inexplicable outflow of monetary assets wouldn’t have occurred as gravely as it did and as such it would have lessened the overall impact of the financial crisis.

Financial Liberalization and its Connection to Offshore Tax Havens

Financial liberalization can be defined as a subsequent reduction of regulations that either inhibit or restrict certain actions within the financial industry of a particular country. What must be understood is that the financial system itself is inherently connected to the lending system wherein financial liberalization results in either the lifting or lessening of restrictions on particular lending instruments or institutions (Ghosh, 2007:171 – 186). This also impacts the types of financial instruments that can be actively traded between banks, hedge funds, financial institutions of countries and the stock market itself (Auerbach & Siddiki, 2004:231 – 235). For example, the repackaged toxic subprime debt that was sold off as “viable” investments was a type of financial instrument that was created as a direct of financial liberalization. What must be understood is that as of late the U.S. has been criticized as being a prime example of what can go wrong with financial liberalization. Since the U.S. has an extremely liberated system which was put into place over the course of three decades this has in effect led to the creation of various risky financial instruments. One example of a risky financial instrument is the practice of short selling wherein investors “bet against” the value of a particular stock speculating that the value will fall. The practice involves borrowing assets from either a bank, institution or broker (usually in the form of securities) and then subsequently selling them off and giving back the same type of securities back to the bank, broker etc. at a later date. What investors are after in this particular case is that they speculate that the price of that particular security will go down after a particular point in time. If the price of the security goes down and the investor buys the same amount he bought and gives it back to the bank, institution, etc. that he borrowed it from he in effect makes a profit off of the difference between prices. As you can imagine this particular practice comes with a high degree of risk wherein the price of the security borrowed may in fact go up resulting in the investor paying more for what he bought in the first place. There is also the case of micro-transactions operated by computers that try to make money off of the difference in stock prices that occur over a few seconds. While the price difference is small, usually amounting to a few cents, the sheer proliferation and scale of the practice has many analysts stating that micro- transactions actually account for more than 60% of all stock trading done in a single day. These practices along with the creation of risky loans and too much credit have been stated as some of the primary causes behind the problems the U.S. economy is currently facing due to a “backfire” effect of having a system that is “too liberal” for its own good. Financial liberalization also has the effect of allowing monetary assets to be easily transferred without limit which also further worsens the economic chaos that occurs in an overly liberalized economy. For example, in 2011 from August to October stock prices reached highs and lows so much within a given week that it was unprecedented in the entire history of the New York stock exchange. The sheer amount of variations that occurred were theorized as being not only the result of competing speculations regarding the strength of certain stocks but were also the result of risky financial instruments at work as well as rapid and numerous capital out-flights and in-flights which came as a direct result of ever changing financial outlooks. It was during this time that various offshore tax havens experienced great increases in the amount of money that was deposited into them as a direct result of uncertainties within not only the U.S. economy but the European economy as well due to the debt crisis that has adversely impacted the region. The inherent problem though with this practice is that, as mentioned earlier, this in effect denies banks access to sufficient capital which has become an ever increasing problem within Europe. In fact Europe is looking far more likely to enter into a depression by 2012 or 2013 as a direct result of capital out-flights which makes the debt crisis even worse. Banks within the region don’t have sufficient capital in order to encourage lending practices and this impacts the overall economy of several countries within the region. While it may be true that the main problem within Europe is the accumulation of sovereign debt which came about as a direct result of financial liberalization and the utilization of new financial instruments the fact remains that one of best ways of helping a region out of a recession is to boost the economy through more lending practices which unfortunately banks can’t do due to significant capital out-flights to safe haven banks in other regions. The fact is that financial liberalization has in effect led to a situation where investors and the wealthy feel “less loyal” to their local economies since through globalization they can in effect preserve their wealth from problems within local economies by merely transferring it elsewhere. The problem with this particular practice is that it doesn’t help local economies at all and in fact makes an already bad situation even worse as seen in the case of Europe and the U.S. In this scenario governments have to help the banks through the use of bail out packages which come directly from taxpayers. This in effect places more of the burden on low to middle class incomes instead of people with high incomes that further compound the problem by practicing tax evasion. Taking all these factors into consideration it must be questioned whether an overly liberalized economy actually helps a country or leads it to fiscal and financial ruin.

Example of Prudent Fiscal Policy in Action

In order to better understand the inherent problems with financial liberalization it is important to examine the case of the East Asian miracle and see prudent fiscal policies in action. An examination of the historical factors leading up to the East Asian Miracle show that the actors involved, namely: Hong Kong, Indonesia, Japan, South Korea, Malaysia, Taiwan and Thailand had several years of supercharged growth as a direct result of market liberalization and a focus on increasing exports to other countries (Yung Chul, 1996: 357 – 363). What must first be understood is that each economy, society and culture in each of the actors involved in the East Asian Miracle is unique and as such it cannot be stated that their sudden growth is inherent to special factors inherent in the countries themselves. A better approach would be to examine the common threads that unite each specific case that gives a better picture of the whole instead of trying to interpret each country on a case by case basis. One of the first aspects that must be answered is how the rapid growth and industrialization happen in these countries did in the first place? One of the reasons why East Asian countries were able to create the “Asian Miracle” was due to the establishment of “prudent” fiscal policies that focused on macroeconomic stability. Compared with other developing countries, the governments of East Asia paid great attention to maintaining macroeconomic stability and creating a good environment of investment and operation activities for enterprises (Yung Chul, 1996: 357 – 363). They followed two basic principles: the use of a prudent fiscal policy and avoiding overvalued exchange rates (Yung Chul, 1996: 357 – 363). It was due to this that they were able to respond to rapid changes in the economic system and create a flexible response to the changes of the economic situation which resulted in the successful management of fiscal deficits, inflation, external debts and exchange rates. These countries usually limited the fiscal deficit carefully in order to cover the deficit without causing sudden inflationary pressures and internal and external debt. It must be noted that macroeconomic stability is conducive to long-term planning and private investment, thereby promoting steady economic growth. All in all, the high savings rate, relatively low taxation, a strong educational system as well as a lower price pressure, access to foreign knowledge and technology, a friendly investment environment and the strategy of government intervention were key factors behind the success of the East Asian countries which resulted in the supposed “miracle”. Another factor that should be taken into consideration is that in 2008 economies and banking institutions within South East Asia, particularly the Philippines, were not as affected or exposed to toxic subprime debt investments compared to their counterparts within Europe. While it may be true that the Philippines or other South East Asian states are not as “financially liberalized” as compared to the U.S. the fact remains that their economies have been stable and growing for years which shows how advocating for financial liberalizations isn’t always a good thing (Orlowski & Corrigan, 1999: 68).

Dominance of Financial Capital and its Effect on Globalization

As financial capital becomes easily transferrable from one location to another this has resulted in companies having the ability to establish new factories and resource centers in other countries due to the ease in which funding can be transferred. This in effect has led to the creation of the modern day outsourcing industry which has been a rather interesting yet controversial issue in the U.S.

Effect on Consumer Markets

When examining either the U.S. or Chinese markets at the present it is important to first take note of the impact the global outsourcing industry has had on both economies. Outsourcing is a way in which companies reduce operational expenses by transferring a particular division or aspect of the company to an international location that has cheaper labor, lower production and utility costs as well as having local government units that promote business through the use of special economic zones that have far lower or next to no taxation (seen in Qingdao region of China and the Subic bay area within the Philippines). This is possible due to the way in which globalization has interconnected markets in such a way that methods of communication, financing and transportation have made transferring businesses and products from one global location to another faster, easier and above all affordable for companies.

Outsourcing and its Effect on China

It was due to this that a distinct trend in production outsourcing began in the U.S. during the late 1980s and accelerated during the late 1990s wherein more companies began outsourcing their manufacturing facilities to locations such as India and China. Within the past 2 decades China’s economy has grown to become the second largest economy in the world as a direct result of government initiatives into encouraging foreign direct investment, local entrepreneurship and real estate development. The outsourcing industry in particular has greatly improved the Chinese economy within the past 2 decades resulting in not only the rapid development and expansion of various urban centers but the creation of an increasingly prevalent Chinese upper class.

The U.S. Consumer Market Today

In comparison the U.S. consumer market today has not only stagnated but is apparently in recession as consumer spending is at an all time low while reliance on government aid programs is at an all time high. The origin of the current problem can be connected to the U.S. housing crisis wherein banks lent consumers more money than they could afford to pay back with various investment companies repackaging the bad debt into what appeared to be viable investments yet when consumers failed to pay their mortgages this created a financial domino effect which up till this day has affected the U.S. economy. The effects of this can be seen in how companies within the U.S. have scaled back their operations, how up to eight million Americans at the present are unemployed with other factors creating a strangle hold on the economy resulting in consumer spending being reigned back in favor of caution during such difficult financial times which has further deteriorated the local economy since consumer spending is the primary driver of a healthy economy.

Conclusion

Based on the data provided in this study it can be seen that the implementation of some means of mitigating offshore tax havens is necessary in order to prevent the constant capital out-flight into other countries during instances of economic instability. On the other and the main problem really isn’t offshore tax havens themselves but rather the misguided financial liberalization practices that have been instituted not only in the U.S. but in Europe as well. As seen in this paper, prudent and conservative fiscal policies lead to slow but stable growth while an overly liberalized financial market can lead to the creation of financial instruments that can create havoc on local economies. It is actually due to this that it isn’t surprising that there has been a distinct trend in international outsourcing brought about by globalization as companies and investors attempt to find more “stable” regions to invest in. China and the Philippines in particular with their prudent and controlled fiscal policies shows how investors are beginning to invest in less open but stable economies due to “safety” such economies provide. Lastly, this paper would like to conclude that one of the reasons behind capital out-flight to tax havens is the fact that financial liberalization has caused economies around the world to be so unstable that the wealthy are beginning to lose faith in the local economy and only go to tax havens as a means of self-preservation during tough economic times.

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Introduction

Carbon tax is a type of tax levied on the amount of carbon emitted during the burning of fuel (hydrocarbon fuel). It an environmental tax that puts a price on the amount of carbon produced in order to reduce the impact it has on the environment. When fuel burns, the carbon in the fuel mixes with air and forms carbon dioxide that is released in the atmosphere as a waste product.

This type of greenhouse gas has the ability to trap heat within the atmosphere and cause climatic changes. Governments have thought it wise to put in place measures to try to reduce the negative effects of carbon by using the carbon tax (Prof and Skou, 2010). Australia also introduced this legislation and it has had both negative and positive effects.

Advantages of carbon tax in Australia

Reduction of the effects of global warming

The levying of tax on the amount of carbon dioxide produced is an important step towards the reduction of the effects of global warming. This is because carbon dioxide is a greenhouse gas that has been determined to cause global warming (Hansen et al., 2000). Carbon dioxide has a blanketing effect on the atmosphere and it traps and reflects heat back to the surface.

This translates to the increase in temperature of the oceans and atmosphere. This can generally cause climatic changes that may be unsuitable. One of the effects is the change in the precipitation patterns. This is due to the changes in sea temperatures. This might also have an effect on the level of the sea as it rises. There is also a possibility of the subtropical deserts expanding.

The Australian government decided to levy tax on the amount of carbon emitted through any process in order to combat climate change (BBC, 2011). This legislation mainly affected the biggest polluters of the environment and these were mostly the producers.

They were forced to pay for each ton of carbon dioxide emitted. However, the huge costs imposed on the producers also translated a substantial cost on the consumers. This is because the producers increased the prices of their commodities in order to subsidize the costs imposed on them.

In the long run, the costs imposed on both the producers and the consumers would work well to reduce the effects of global warming. This is because the producers would try their best to avoid coal as a form of energy and start to use other cleaner fuels that have less harmful effects on the environment.

This would make coal a less competitive fuel type and people would prefer other sources. This would translate into less carbon dioxide emissions and consequently, the protection of the environment from the harmful effects of greenhouse gases.

The consumer, on the other hand, would also help in the realization of the same goal of reducing the effects of global warming by making some changes in their everyday lives. For example, in order to reduce the costs incurred while driving fuel-guzzling vehicles, one might be forced to exchange it for one that is more fuel-efficient.

This would mean that the vehicle would go for more kilometers for the same amount of fuel. In effect, this means that the amount of fuel used is reduced and the total amount of carbon dioxide produced is also reduced. This is important while considering reducing the effects of global warming.

Compensation for low income earners

The low income earners would be able to be compensated due to the Carbon Tax (Lucas, 2012). This is because of the carbon-pricing scheme. Alison said that this is especially important because those individuals who earn a low income are usually the first ones to be affected by climate change. She also said that they are the ones who are worst hit. The pricing scheme would help to tap back the revenues from the tax to favor the low income earners.

In order for the government to ensure this happens, it must first impose carbon tax on producers. The high cost of production then translates to higher pricing of commodities. This means that the consumers need to go deeper in their pockets to pay for the commodities.

The government then returns some of the funds collected from the Carbon Tax to the most deserving consumers. Those deserving consumers are selected using a minimum income threshold. Therefore, they are not affected by the increase in prices.

Disadvantages of the Carbon Tax

Negatively affect the Queensland Tourism Industry

Queensland’s tourism industry was worried about the effects that the legislation would have on the tourism industry. The Council Chief executive argued that the legislation would cause an increase in the cost of doing business. This was due to the indirect and direct impacts that the legislation had on energy costs. The cost of traveling would increase since the cost of fuel would increase (Barlow, 2012).

The tourism companies would then be forced to hike their prices in order to meet the costs and make profits. To make things worse, the industry was already struggling to get back to its feet after it had been crippled by natural disasters. However, it was not possible to measure the exact cost or damage figure that was going to be incurred.

Gschwind argued that the Australian tourism and hospitality industry was going to be adversely affected. He also said that it was going to lose its international competitiveness. Since the holidays would be more expensive to spend locally, many travelers would opt to go abroad to spend their holidays elsewhere. This would mean that the revenue would be shifted and it would benefit the economy of other countries.

Increase in cost of living

The Carbon Tax has a rippling effect on the costs of goods and services (Martin, 2012). As the cost of producing commodities goes up, the cost of purchasing them also goes up. This means that individuals would need to pay more for the commodities that they paid less for initially.

The costs of running businesses also go up due to the costs incurred by the businesspersons during transportation and the purchase of raw materials. This might have negative effects on the profitability of businesses. Individuals would also need to pay more in order to use their vehicles. This increases the cost of living especially if one needs to travel to the place of work by car.

The chief executive of the Housing Industry Association (HIA) also proposed an increase in the cost of building a new home and this was due to the Carbon Tax. This was due to the increase in the cost of raw materials that need to be sourced from overseas. Those willing to buy a house would be required to make higher mortgage repayments and those interested in building would need to incur higher building costs.

References

Barlow, G 2012, ‘Carbon confusion’, Weekly Times Now, 23 May, p. 3.

Hansen, J., Sato, M., Ruedy, R., Lacis, A & Oinas, V 2000, ‘Global warming in the twenty-first century: An alternative scenario’, Proc. Natl. Acad. Sci. U.S.A., vol. 97, no. 18, pp. 9875-9880.

Lucas, C 2012, ‘Carbon rebate should not affect minimum wage’, National Times, 22 May, p. 12.

Martin, D 2012, ‘Australia adjusts to its new energy role’, Wall Street Journal, 20 May, p. 9.

Prof, A & Skou, M 2010, ‘Europe’s experience with carbon-energy taxation’, Sapiens, vol. 3, no. 2.

Introduction

Across the world, governments tax people’s income in order to generate revenue for economic development of nations. It is imperative to note that income tax revenues constitute the biggest percentage of the revenue generated by the government. For instance, in Canada, the biggest share of government revenue comes from personal income at 75% compared to 25% that come from other forms of taxation.

So far, the progressive tax structure employed by the Canadian government seem effective than flat rate structure that other countries use, at least according to some analysts.

In Canada, the Canadian Revenue Agency has the responsibility of collecting personal, corporate and other income taxes on behalf of the federal government. It has the responsibility of collecting all forms of taxes in all provinces and territories with the exception of Alberta and Quebec (Aronson, Johnson and Lambert 262-270).

Taxation is not a new phenomenon as it is an old practice well known and supported by numerous acts and statues, as part of legislation. In Canada for example, the Income Tax Act empowers the federal government the ability to collect all forms of taxes from incomes. Among the taxes are personal and corporate income taxes. Different counties have different tax regimes.

In Canada, self-assessment regime is common where individual citizens evaluate their tax liability by making tax returns to the Canadian Revenue Agency within the stipulated time. Consequently, the Canadian Revenue Agency will evaluate the tax returns and data in order to ensure that there are no obvious errors.

In case the taxpayer does not agree with the Canadian Revenue Agency in terms of his or her tax assessment, there are proper channels of making an appeal (Gentry and Hubbard 283-287).

Implication

There are two major structures, the progressive tax structure and the flat rate structure. To start with, the progressive rate structure of tax requires individuals with tax ability should not only pay more taxes for their higher income, but also pay a larger percentage of their incomes in tax.

On the other hand, the flat rate structure of tax takes away a same percentage of incomes from everyone who has the duty to pay taxes without considering the gap of different taxpayers. These two structures have their own merits and demerits (Auerbach, Kotliko and Skinner 81-100).

To start with, the progressive tax structure emphasizes on equality rather than the general collection of personal income tax. Under progressive tax structure, the more the personal income, the more tax, hence it brings equality. In addition, progressive tax is also efficient because it can adjust itself to the changes in economy.

In times of inflation, the progressive tax structure is the best as it corresponds to the hard times of inflation, for example, the widespread wage increase. Additionally, the progressive tax structure enables distribution of wealth among all classes of people with an aim of bringing social equality (Clemens and Veldhuis 5-7).

Progressive tax structure versus Flat tax structure

According to many analysts, the progressive tax structure that the federal government of Canada uses is advantageous towards the realization of full economic of the citizenry and the country at large. In fact, they credit it as the best structure of taxation as compared to flat structure.

As Calsamiglia and Kirman notes, there has been a growing concern that personal and corporate taxes discourage economic growth by making many Canadians less interested to work. This is especially evident if a country applies the flat structure.

In addition to this, entrepreneurs always complain of additional incurred costs arising from the flat tax code and the inefficient collection system. Consequently, this has created huge and unmatched incentives owing to the distorted supplementary costs (1142-1154).

Simplicity: In terms of simplicity, Canadians believe that the progressive tax structure is simpler as compared to the flat tax structure. For example, in order to file tax returns, people spend so much money and time to not only file the records, but are also able to maintain them due to the simple tax code.

On the other hand, under the flat tax structure, the Canadian Revenue Agency will spend so much money to enforce tax laws and collect personal income taxes—over $30.8 billion annually. Thus, comparing the two structures, in terms of compliance, progressive tax structure is proficient, while in terms of administrative costs, flat tax is proficient.

Efficiency: In terms of efficiency, the progressive tax structure raises the projected revenue, and addresses the economic disruptions arising from taxation. Personal income taxes change incentives that are paramount in the production behavior, meaning, many people would invest or even have money to save. In fact, progressive tax structure may be efficient in terms of establishing equality, but it has disadvantages too.

A good example is that it slows the pace of economic progress of activities. On the other hand, flat tax is an epitome of efficiency, but it fails to address some of the issues arising from taxation such as consumption rather than income. In other words, the Canadian-tax system should stick to the progressive tax structure in order to promote savings and investments.

Flat tax structure mandates the federal government to tax individuals or families on expenditure rather than their incomes. In a way, this will affect government revenue and the general economy. The progressive tax structure minimizes the progressive tax structure rates through rising rates, thus, creating equality in terms of taxation (Calsamiglia and Kirman 1160-1172).

Fairness: As discussed above, although flat tax has some advantages, it fails to address some pertinent issues. For example, in order to bring equity to the current tax system, horizontal and vertical equity are necessary, and this is only possible under the progressive tax structure.

Horizontal Equity: In economics, horizontal equity is a situation whereby all persons or households who get the same amount of income pay equivalent tax deductions. It is true that the current progressive tax structure achieves horizontal equity because people pay tax according to their income. Consider an example where a corporate pays dividends to a Canadian with a shareholder of 21% in a firm.

The progressive tax structure proposes a 19.6% tax rate at provincial level and 14.5% tax rate as federal income tax. It therefore means that progressive tax structure rates vary unlike the flat rate structure where rates are the same even for people with low income. Additionally, unlike the progressive tax structure, flat tax encourages equal pay of tax for every individual without considering the levels of their income (Kaplow 139-143).

Vertical Equity

Under vertical equity, people who generate more income ought to pay corresponding higher taxes. In all provinces that make up Canada, with exception of Alberta, individuals with high personal income pay higher tax rates on their income. As Kaplow notes, in terms of progressivity, the flat tax structure needs more attention, and Canadians do not enjoy progressivity owing to flat marginal income tax rates.

On the other hand, the progressive tax structure brings equality as the more the income, the more the tax; hence, it not only removes the negative aspect of increasing marginal tax rates, but also ensures progressivity.

In other words, a single-flat tax will encourage distinctiveness of individuals or households, but the progressive tax structure encourages investment in entrepreneurial activities at much lower marginal tax-cut rates (147-154).

Government Revenue

Many Canadians prefer the progressive tax structure rather than the flat tax structure. This is simply because they believe that the flat rate structure comes with many risks, which will paralyze the operations of the government. A flat rate structure on personal income means that all people irrespective of their income levels will have to pay similar amount as taxes. In other words, the revenue generated would not be high.

Additionally, the flat rate structure will be a disadvantage to low income earners who would like to save some money and invest it in entrepreneurial activities. It is also important to note that the median income earners and the above pay more than 95% of federal personal income taxes.

Notably, the government will have difficulties to retain the same revenue under the flat rate structure of personal income tax on conditions that other terms remain constant(Hall and Rabushka 465-476).

Another disadvantage of the flat rate structure is that it functions as “auto stabilizer”. Meaning, the revenues collected by the government will be low in comparison with the progressive tax structure. Largely, under the flat tax structure, the economy of a country is likely to deteriorate or remain the same.

Certainly, the government can respond to the risk by enlarging tax-base, lowering marginal tax rates, and canceling tax exemptions. This is the reason why progressive tax structure is more convenient than the flat tax structure.

It is also imperative to note that in terms of administrative and operational costs, the progressive tax structure is more convenient than the flat tax structure.

The Canadian government has put in place proper infrastructure, and an impeccable administration management system for both personal and corporate income taxation. Consequently, this will not only improve tax collection afterwards, but also increase the gross government revenues (Paulus and Peichl 620-636).

Conclusion

In Russia, a country that introduced 13% flat rate tax in 2001, government revenue did not increase. Instead, flat rate structure made it easier for some people to evade paying personal income taxes. The government of Russia does not collect the same amount of revenue it used to collect under progressive tax structure.

There are also reduced incentives and decreased labor supplies among other things, which are bad to the economy. Looking at the implications of flat tax on vertical equity, government revenue, fairness, generation of incentives, and economic efficiency, one cannot easily choose between flat rate and progressive tax structures.

In terms of efficiency, flat rate is more convenient, but on economic efficiency, government revenue, increase of incentives and effectiveness, the progressive tax structure is effective. Therefore, the progressive tax structure is the best suited for personal income structure.

Works Cited

Auerbach, Alan, Joseph Kotliko and Jeff Skinner. “The efficiency gains of dynamic tax reform”. International Economic Review 24 (1993): 81-100. Print.

Aronson, Richard, Paul Johnson and Peter Lambert. “Redistributive Effect and Unequal Income Tax Treatment.” Economic Journal 104.1 (1994): 262-270. Print.

Calsamiglia, Xavier, and Alan Kirman. “A Unique Informationally Efficient and Decentralized Mechanism with Fair Outcomes.” Econometrica 61.5 (1993): 1147-1172. Print.

Clemens, Jason, and Niels Veldhuis. Growing Small Businesses in Canada: Removing the Tax Barrier, Ontario: The Fraser Institute, 2005. Print.

Gentry, William, and Glenn Hubbard. “Tax Policy and Entrepreneurial Entry.” American Economic Review 90.2 (2000): 283–287. Print.

Hall, Robert, and Alvin Rabushka. “The Route to a Progressive Flat Tax.” Cato Journal 5 (1985): 465-476. Print.

Kaplow, Louis. “Horizontal Equity: Measures in Search of a Principle.” National Tax Journal 42 (1989): 139-154. Print.

Paulus, Alari, and Andreas Peichl. “Effects of Flat Tax Reforms in Western Europe.” Journal of Policy Modeling 31.5 (2008): 620-636. Print.

Introduction

The increased need for environmental sustainability within the global perspective has made countries to adopt robust strategies. The effects of global warming and high production levels of carbon have particularly drawn a lot of interests. Countries have extensively debated on the growing concern. Evidently, there have been development and ratification of several policies that have influenced the operations of most global firms.

Australia includes one of the countries that have adopted robust measures towards reducing its carbon production levels (Kenrick, 2011). Through this initiative, the operations of most of its firms have been greatly influenced. Observably, this has occurred within the domestic and the international platform.

Carbon tax refers to the government’s initiative for minimizing the level of carbon emissions. Basically, this initiative places a permanent price for the quantity of pollution. The federal government is the sole initiator of the carbon tax principle. Although the policy may have positive implications, it is also notable that there are negative effects (Kreiser, Sirisom, Ashiabor & Milne, 2011). Particularly, this might be applicable to the firms.

The focus of this paper is on the examination of the Australia’s Carbon Tax and its impacts on the strategies of firms within the country. It also examines the impacts of this policy on the firm’s local as well as global competiveness. In supporting the discussions, corporate examples drawn from particular industries and nations are given.

Impacts of the Implementation of Australia’s “Carbon Tax”

It is evident that Australia’s manufacturing industry will be grossly affected by the carbon tax initiative. Most corporate leaders have projected that from this policy, nine out ten corporations will bear negative effects from the tax policy. Approximately close to one million manufacturing personalities admit that they are facing pressure. This is mainly because of the carbon tax (Siriwardana, Meng & McNeill, 2011).

The additional taxes imparted on the raw materials have had severe financial implications on the operations of these firms. Most firms have to incur huge expenditures in obtaining locally available raw materials. In effect, this has minimized their level of competitiveness within the global scenery.

Because other global firms do not have to face the same taxes chargeable on the locally available raw materials, they have gained a remarkably competitive edge. Therefore, Australian firms are increasingly getting distinct within the global market place. Already, there are suggestions from the “Australian Trade and Industry Alliance” to have the government employ the persons severely affected by the tax policy (Reid, 2012).

Such initiatives indicate that the policy has made most firms to lose the grip of their human resources. Due to the severe financial impacts of the firms, they cannot maintain the employment of a large pool of employees. Therefore, the government has been the last resort for reliable employment. The government’s “Jobs and Competitiveness Program” has been widely criticized despite its potential benefits (Rourke, 2012).

The program was established to help the industries, especially the manufacturing as well as the alumina production. These industries have been eminently affected by the tax policy. There is also an indication that approximately 40 per cent of the revenue drawn from this tax policy will be ploughed back into the business and other affected industries. This is proposed to support them to adopt cleaner production technologies.

Generally, this tax policy has drawn very mixed reactions from within the industrial community and other allied stakeholders. Indeed, there exist contradictory arguments as well as opinions across the general industry. Finance, housing and some government agencies also depict conflicting tendencies towards the matter.

Australia hosts the globe’s giant aluminum corporation. Rusal has high employment capacity and holds about 20 per cent of Queensland Alumina Refinery. However, eminent complaints as a result of the carbon tax policy are already observed from the company. The company’s management has indicated that intensive projects that have the capacity to offer several job opportunities are already negatively affected by the policy (Fukasaku & OECD, 2012).

In fact, they indicate that these projects already have to be halted due to the impacts of the carbon tax policy. Concurrently, this has impacted negatively n their international business. For instance, the corporation has continually faced a minimized production and supply capacity within the global marketplace. Some of the projected expenses on the carbon tax policy include an approximate of $40 million annually.

Most officials have indicated that this huge expenditure could be constructively used in the expansion of the firm as well as in other future energy initiatives. There are expectations that this policy is bound to make Australia stand out to be more environmentally sustainable. The country is likely to depend minimally on the fossil fuels.

There are other potential industries that are yet to gain from this policy. For instance, the engagement of the “Clean Energy Finance Corporation” will be critical in funding other industries for clean energy options (Smith, Vromen & Cook, 2012). There are also indications that the policy is yet to open doors for the development of several greener industries and employment opportunities. Some of these will include the renewable energy development, carbon farming as well as other sustainable designs.

There have also been indications that the observance of the tax policy by the companies might hinder their potential for future expansion and investment. This is because of the heavy and intensive financial impacts of the tax policy. The other industries to be grossly affected include the coal as well as the iron ore industry. Notably, Australia remains as the world’s largest exporter of the coal. Coal is meant for the generation of electric power.

Apart from these, there have been approximations that over 500 companies are bound to be affected by the carbon tax policy in Australia. Amongst some of the highlighted corporations and institutions to be grossly affected include the power generators and the mining companies. Others are intensive industry firms. Institutions that were highlighted include Crown Melbourne as well as La Trobe University, all of which produce their personal electricity (Harrison & Sundstrom, 2010).

The high power generators are also grossly affected by the carbon tax policy. These include the notable firms such as the Latrobe Valley giants. Amongst some of these companies that are top in the list include Loy Yang and International Power. TRUenergy is also bound to be affected. Other potential mining firms that are considered to bear negative implications from the policy include BHP and Rio Tinto. It is also important to note the intensive industry firms like the Alcoa.

The effects of the policy on the operations of these companies may either be realized at the local level or within the international market. Ideally, these impacts are both applicable particularly for companies with a global presence. Because the raw materials are bound to be potentially expensive, the production capacity of these companies will significantly reduce. Consequently, their ability to produce and supply huge stocks within the international marketplace also reduces.

This will decrease their competitiveness and lead to massive losses within the international scene. At domestic level, these companies have projected losses associated with high production costs and lack of funds to maintain skilled and unskilled workforce (Watson, 2012). There are also bound to be huge tax implications on the production systems.

The need to redefine and design new production technologies to be compliant with greener technologies will also require additional funding and finances. From these observations, it is clear to note that severe financial implications must be incurred. Of particular interest is the impacts of this tax policy on the performance and relationship of East Timor with the Australian government. Discussion is already underway on issues concerning the carbon tax policy and its impacts on East Timor.

Generally, it can be noticed that East Timor is more likely to be affected to the tune of millions of dollars annually. This is majorly due to the effects of carbon policy on the “Joint Petroleum Development Area “. This is co-owned by the two nations. Generally, it is evident that carbon tax policy has significant impacts in almost all sectors of the Australian economy (OECD, 2010). There is an observation that the Queensland small as well as medium level businesses are yet to pay very elevated charges due to carbon tax policy.

The small scale businesses are also bound to suffer intensive losses. This is because of the reduced spending realized on the side of the general consumers. The high costs chargeable on basic utilities such as electricity can never be passed by the small domestic enterprises. This explains why they must be severely influenced or affected by the carbon tax policy. There have been indications that levying high tax rates for the sole bread winners of the country in Queensland will have severe long term economic implications for the entire nation.

Top mining firms such as BHP Billiton have indicatively begun to outlay most of their potential employees. Basically, this is observed mainly due to the impacts of the carbon tax policy (Wroe, 2012). The difficulty in transition for most Australian firms during the period of implementation of the carbon tax policy is also observable. This is mainly due to the financial implications that will be involved in the adjustment process.

Most specialists have indicated the likely effects of the carbon policy on the potential miners. Although the policy costs will not terminate the operations within the minor mines managed by a majority of producers, there will be potential effects. For instance, this will make the firms to evaluate the locations in which the projects are to be situated. They have to reconsider their next locations for investment. The raw materials and the mining sector feel the pressure of competition realized from the presence of the dollar.

It is notable that due to this policy, several firms are presently reviewing the long term sustainability and profitability of some particular operations and investments that they have. There are potential indications that the most Australian producers are disadvantaged. This is relative to some of the potential global competitors who have the capacity to dilute the Australian expenses on carbon as a proportion of the international revenues (Jain, 2011).

It is critical to observe that the carbon tax is bound to have severe direct as well as indirect impacts. There have been other arguments that within the long run, the carbon tax policy is more likely to increase the international dominion and profitability of the Australian firms. In this view, most governments have lauded the initiative and are already implementing likewise policies within their countries.

The arguments supportive of this system indicate that the global business is more likely to favor greener technologies in the future (Wroe, 2012). This is majorly due to the increasing need for economic and environmental sustainability. Other industries to be affected by the policy include the building and construction as well as the firms involved in tourism and hospitality. It is projected that this policy will have severe impacts and increase the costs involved real estate investment.

Conclusion

There have been numerous debates regarding the potential impacts of the Australian carbon tax on firms and citizens. The involvement of politics on the issue has particularly led to conflict of interests. It is observable that both long term and short term impacts of the carbon policy must be comprehensively reviewed.

Although most short term impacts might be detrimental, it is vital to note that the long term impacts are largely beneficial to the whole society. This also extends to the international domain due to the significant cut-offs in the quantities of carbon produced into the system.

Environmental sustainability has become an integral part of sustainable economic development. Therefore, the recognition and adoption of greener technologies must be encouraged. There is evidence that these impacts are severe both at the domestic and international level. Therefore, it is appropriate for the affected firms to apply robust measures towards minimization of the impacts and adoption of greener technologies.

References

Fukasaku, K. & OECD (Organisation for Economic Co-operation and Development). (2012). Southeast Asian economic outlook 2011. Paris: OECD Pub.

Harrison, K. & Sundstrom, L. M. (2010). Global commons, domestic decisions: The comparative politics of climate change. Cambridge, MA: MIT Press.

Jain, S. (2011). Enhancing global competitiveness through sustainable environmental stewardship. Cheltenham: Elgar.

Kenrick, V. (2011).Impact of the Carbon Tax on Australian Business and Economy. Web.

Kreiser, L., Sirisom, J., Ashiabor, H. & Milne, J. (2011). Environmental taxation and climate change: Achieving environmental sustainability through fiscal policy. Cheltenham, UK. Northampton, MA: Edward Elgar.

OECD (Organisation for Economic Co-operation and Development). (2010). Taxation, Innovation and the Environment. Paris: OECD.

Reid, T. (2012). CARBON TAX OVERVIEW. Web.

Rourke, A. (2012). Uncertainty hangs over Australia on eve of carbon tax introduction. Web.

Siriwardana, M., Meng, S. & McNeill, J. (2011). The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model. Web.

Smith, R., Vromen, A. & Cook, I. (2012). Contemporary politics in Australia: Theories, practices and issues. Port Melbourne, Vic: Cambridge University Press.

Watson, P. (2012). Australians Face Huge Fines For Speaking Ill Of New Carbon Tax. Web.

Wroe, D. (2012). Carbon tax hit list below expected 500 companies. Web.

Introduction

The article titled “Chicago’s Soda Tax is Repealed,” published by The Economist on October 13th, 2017, celebrates the repeal of the infamous soda tax, which received large amounts of criticism from both the soft drink lobby and the regular customers, who were upset with how their soft drinks suddenly went up in price. The price increases were quite significant, ranging from 10% to 50%, depending on the amount of added sugary sweeteners (Terruso 2017).

This caused a panic among the populace of Illinois, some of the more industrious citizens driving to other states in order to stock up on soft drinks. While the article seems to lend support to the bold claim that the tax was a “beverage taxes are really a money grab that has nothing to do with public health,” the issues regarding the tax run deeper than being an attempt to clog an 1.8 billion hole in the budget (“Chicago’s Soda Tax” 2017).

Analysis

The main issue with sugary drinks is closely related to America’s ongoing obesity problem. The author cites this and even shows some statistics to back up the claim, but never lends any narrative credibility to the healthcare statement. On the other hand, the preference for the narrative of the soft drink lobby. The title itself describes the author’s position perfectly – the second line under the article says the repeal is “A big victory for makers of sweet drinks,” but does not mention that it is a loss for the pro-health care lobby (“Chicago’s Soda Tax” 2017).

The sad truth is that sugary drinks are directly responsible for the obesity problem currently plaguing the USA. While the authors mention that sugary drinks provide empty calories and that 20 to 23% of all America’s children are obese, it is not the whole story (“Chicago’s Soda Tax” 2017). Various researchers have been alarmed with increasing rates of obesity ever since the beginning of the 21st century, and all of them point out towards sugary drinks as a prominent factor. Actual obesity numbers for US adults are even higher – 30 to 32% (Caprio 2013).

In many cases, the foundation for long-term weight problems was laid out during youth and adolescence. Caprio (2013) states that the calories in soft drinks are dangerous because the body does not register them as food. A person who consumes hundreds of calories via sugary drinks does not feel sated, which is an effective path to overeating. In addition, caffeine and sugar, which are present in many soft drinks, actually cause dehydration instead of quenching thirst, contrary to popular advertisements (Caprio 2013).

Lastly, the author fails to mention that the so-called soda drink tax is not an American invention. Similar laws have been passed in many countries, such as the UK, France, Denmark, Norway, Ireland, Hungary, and others (Forster 2017). According to a meta-analysis performed by Escobar et al. (2013), taxation of sugary drinks leads to a decrease in demand for them as well as to a decrease in the prevalence of overweightness and obesity.

The article correctly pinpoints the weaknesses of the tax in its current form. One of the major complaints is considering fruit juices, which also contain added sugar (“Chicago’s Soda Tax” 2017). Other concerns revolving around the Soda tax are related to the economic prosperity and needs of the customers. As the population of Illinois demonstrated, they do not need the government to tell them what is healthy and what is not, defending their freedom of choice, even if the said choice is poor from a healthcare perspective. Soft drink producers, on the other hand, are unhappy with profits decline from the artificial price increase. Such an intervention is against the laws of the free market.

Conclusions

On the one hand, there is a clear health benefit to the tax, even in its current and imperfect form. On the other hand, however, is the profitability of large corporate entities and the freedom of choice of many American citizens. According to the National Diabetes Statistics Report (2017), more than 29 million Americans have diabetes, which is often associated with and caused by obesity and overweightness. At the same time, statistics show that the primary consumers of sugary drinks come from impoverished backgrounds.

In other words, these people lead an unhealthy way of life and then demand the government to pay for their healthcare. In my opinion, if the government provides for these peoples’ insurance, covering more than 50% of its initial costs, then it has a say in what kind of lifestyle they get to live.

Bibliography

Caprio, Sonia. 2012. “Calories from Soft Drinks – Do They Matter?” New England Journal of Medicine 367: 1462-1463.

“Chicago’s Soda Tax is Repealed.” 2017. The Economist. Web.

Escobar, Maria Cabrera, Lennert Veerman, Stephen Tollman, Melanie Bertram, and Karen Hofman. 2013. “Evidence that a Tax on Sugar Sweetened Beverages Reduces the Obesity Rate: a Meta-Analysis.” BMC Public Health 13: 1072.

Forster, Katie. 2017. “Budget 2017: New Sugar Tax Confirmed by Philip Hammond in Fight to Combat Rising Obesity.” Independent. Web.

“National Diabetes Statistics Report, 2017.” 2017. CDC. Web.

Terruso, Julia. 2017. “Philly Finds New Tax not so Sweet.” The Inquirer. Web.

Introduction

Inheritance tax is a tax levied on individual properties at the time of their demise. According to the universal tax laws, inheritance tax and estate tax are different. The estate tax is levied on the assets of the dead, whereas inheritance is levied on the inheritance received by the beneficiaries of the deceased’s assets. Nonetheless, the disparity between estate and inheritance tax is normally assumed by taxation laws. For example, in the UK (United Kingdom) inheritance tax is a tax levied on the assets of the dead and therefore estate tax and inheritance tax are more of the same.

Inheritance/ estate tax is a progressive tax which means that it is only applicable to the higher income earners. The changes in the UK tax law in 2007 set the exemption limit at £ 325000, which means that any property which values less than this amount is exempted from inheritance tax. In other words, inheritance tax cushions the poor and places a tax burden on the rich. The proponents of inheritance tax believe that it contributes in bridging the gap between the rich and the poor.

On the other hand, critics argue that it has done practically nothing to bridge the gap between the rich and the poor. In addition, inheritance tax discourages saving and investment. According to the economic experts, when the estate tax increases the number of taxable property decreases, meaning that individuals resort to high expenditure and less saving in response to the escalating tax rate. The paper explores UK inheritance tax and the laws governing it. In addition, the paper investigates the pros and cons of the inheritance tax law and attempts to find out whether it should be retained or abolished. The study embraces legal and academic view points to achieve this objective.

UK Inheritance Tax

Inheritance tax in the UK falls under the Capital Transfer Tax Act of 1984 (IHTA). Inheritance tax in the United Kingdom is levied cumulatively when an individual dies or on transfers during a lifetime. HHTA does not apply to transfers made by companies except for gifts to shareholders as articulated in section 98. Property or assets worth less than £ 325000 are exempted from inheritance tax and fall under the ‘nil band rate (IHTA s2). The UK government announced in 2010 that the minimum threshold for inheritance tax (£ 325000) will remain in place till 2015, after which it will increase depending on the consumer price index. Earlier the government had increased the threshold to £285000 for 2006/07, £300000 for 2007/08, and £500000 for 2009/10. The last increase was revoked by the labour government and frozen at the current rate.

Lifetime transfers are taxed at the rate of 20 percent and the cumulative value at the time of demise is charged at 40 percent. In a case where more than 10 percent of the deceased wealth is left for charity, the rate is reduced to 36 percent. Transfers made between three to seven years before the descendents demise also attracts reduced rates. On the other hand, transfers made seven or more years before the death of the descendent attracts the normal rate. A gift to business concerns or discretionary trusts that surpasses £ 325000 also attracts inheritance tax but at a reduced rate of 20 percent. The demise of the benefactor within seven years attracts additional taxation but the initial tax is deducted.

A number of assets or property, for instance, those related to farming and small-scale businesses are entitled to tax relief. Tax relief may reduce the value of an asset for tax purpose by half or more depending on property type. The UK government in 2007 permitted the use of unused threshold among spouses. This means that if one of the partners passes away, the surviving partner can bequeath double the inheritance tax threshold.

The cumulative value of assets on death includes all the assets of an individual irrespective of their location. They include real estate, personal belongings, and investments. Certain items are free from inheritance tax regardless of whether they were transferred during an individual’s lifetime or at the time of death. These items include gifts to spouses, gifts made to charitable organizations, gifts made to political parties, and dispositions for the interest of the nation (IHTA s25). However, it should be noted that spouses or civil partners with no domicile status have a lifetime limit in enjoying tax exemption. The limit is intended to tackle the risk of tax evasion in the future in case the beneficiary decides to get rid of the assets abroad. The limit has been fixed at £ 55000 since 1982. There are other gifts that do not attract inheritance tax. The most significant of these are gifts made as normal expenditure (FA 1986 s 102 (5), gifts made within a tax year and do not exceed £3000 (IHTA s20), and bride gifts that do not exceed £5000 (IHTA s22).

The inheritance tax liability of an individual in accordance with the UK laws is based on their domicile at the moment of property transfer. This well articulated in section 267 of the IHTA 1984. The residence status can be attained by origin, through parents or permanent residence. The concept of domicile according to the UK tax laws goes beyond physical presence in the country. This means that the property of the domiciled individual is subject to inheritance tax regardless of its location in the world. Individuals whose domicile lie outside the United Kingdom are only accountable to inheritance tax on property and assets that are located within the United Kingdom.

Domicile is a concept based on universal law and is not meant for tax purpose only. It described permanent residence or intention to settle permanently in a particular jurisdiction. Therefore, the UK laws ascribe domicile to any individual at birth and long-term residence. The latter must have domiciled within three years before the transfer of property or assets or have been a resident in the UK for 17 years out of 20 years. In addition, each and every individual is entitled to the nil-rate band irrespective of their domicile status.

Pros and Cons of the UK inheritance Tax

Further analysis of the law is important after exploring different chapters and sections. The analysis includes exploring the advantages and disadvantages of the law. There are a number of arguments for and against inheritance tax. Experts claim that inheritance tax can be more intricate. While the tax affects small number of the households, it perpetuates the progressiveness of the income tax by levying tax on wealthy estate owners and exempting the rest. This is well elaborated in section 2 of the law (IHTA 1984 s2). The Act delineates chargeable transfers and exempted transfers. Inheritance tax can be regarded as a premium profit tax since the inherited funds are not earned through work. It is usually valued at the date of the decedent’s death. If the property was to be sold on that particular day, it would tentatively pay nothing in capital gain-tax even if the deceased had accrued a considerable gain in the amount of assets. Therefore, inheritance tax eliminates a number of tax benefits associated with asset gains, thereby benefiting the government only while denying beneficiaries certain advantages.

In some jurisdictions, for instance UK, inheritance tax must be paid in cash within a specific period after the demise of the descendent. The amended IHTA s2 requires that Inheritance tax be paid in cash seven months after the descendent’s demise. In some instances, the only asset available is the business itself. Thus, inheritance tax may lead to the liquidation of an estate or business, instead of transferring it to the rightful heir. This may permanently affect the financial future of the beneficiaries. This may happen even if the business is in the right position to pay the tax.

The principal benefit of inheritance tax is the revenue it provides the government. Inheritance tax provides billion of pounds in revenue which has helped the government to fund major projects and pay civil servants. In addition, the revenue collected from inheritance tax has enabled the government to provide income tax breaks. The tax breaks enables the government to relieve the citizens of tax burden without resorting to other fiscal measures. However, the opponents argue that the inheritance tax fetches little revenue and in most cases constitute less than one percent of the overall revenue collected by the government. Furthermore, the government spends more money on salaries of the revenue officers keeping track of property and gifts transfers and the legal team handling defaulters.

Gorge Osborne argues that Inheritance tax is a secondary/double tax since most of the assets or properties inherited have already been taxed via income tax. Therefore, levying inheritance tax on a property or asset is unfair; particularly to those that earns little or no income. As a result, most of the taxpayers have resorted to unconventional practices to reduce or do away with the inheritance tax burden. For governments that heavily relies on the revenue generated from the system it may present a budget deficit. From the above arguments it is apparent that the cons outweigh the pros. For this reason, individuals in the UK have been exploring different ways of minimising the impact of the inheritance tax or avoiding it altogether. This leads us to the next chapter.

Avoiding Inheritance Tax

Most people spend most part of their life amassing a considerable amount of wealth to support them during the old age and their offspring. The government’s fiscal and monetary policies are aimed at encouraging savings and capital accumulation. However, with poor planning and lack of pre-emptive action individuals may face heavy tax burden. The inheritance tax, if left unchecked, may deprive individuals a considerable amount of the inheritance. The impact of inheritance tax can be avoided or minimised through careful planning.

In order to avoid paying high taxes, individuals must know the value of their estate that is taxable. The estate includes money, securities and other valuable assets. According to IHTA 1984 s49, inheritance tax on the gross estate can be minimised or avoided by transferring them to the surviving spouse or civil partner. However, IHTA 1984 s 102 (5A) prevents such exemptions provided that the benefactor does not enjoy or derives benefits from the same property/asset. Property transfers to a living spouse are the easiest, effective and legal way of avoiding inheritance tax. As long as the surviving spouse lives in the UK he/she is exempted from inheritance tax.

In the case of Thorner v Government, the defendant had gifted the property to another individual but still enjoyed rent free accommodation. Paragraph 143332 of the Amended UK Inheritance Tax Act 2007 prohibits gifts with reservation of benefits. Therefore, gifts that are still benefiting the original owner (benefactor) are taxable under the law. Such gifts are still considered to belong to the original owner. However, there are minor reservations to the law, for instance, temporary or occasional use of the property. The court found the defendant quality of tax evasion and was charged accordingly.

Transferring money or property to a trust is permissible under the UK’s Trustee Act 1925 s31/3.The trust can then loan the assets to the beneficiaries. The debt owed to the trust decrease the value of the asset and therefore little or no tax is charged on the asset. The use of special trust is most suitable especially when the spouse or heir is a non-citizen. However, the property will be taxed once the beneficiary dies.

The case of Macpherson v CIR is an example of tax avoidance through trust transfer. The defendant entered into an agreement with a trustee firm to hold some priceless painting for about a decade and half. The following day the company appointed a life interest in the property to the defendant’s child. The deal led to the decline in value of the painting. HM Revenue and Customs successfully challenged the case and showed that the defendant proposed to grant an unwarranted benefit to the child. For that reason, the trustees were denied benefits articulated under section 10 of the IHTA 1984.

A similar case involved Reynaud v CIR. The Reynaud brothers agreed to sell their company, Computer Limited. They each transferred their shares to a trust firm for the future benefit of their children. The next day the same company bought the same shares from the trustee firm. HM Revenue and Customs challenged the company’s tax relief in a special tribunal. The tribunal held that the transfer of shares to a trust firm was aimed at diminutions of the property value, thus violated section 268 (3) of the IHTA 1984.

Inheritance tax can also be avoided by transferring funds bit by bit to the heir while still alive as long as the amount do not exceed the nil-rate band. This technique is also effective and is permitted under gift reservation rule (FA 1986 section 20 par 7). Financial gifts in the form of school fees or medical expenses are free from any kind of tax, therefore not restricted to any amount transferred (FA 1986 section 20 par 9)³⁷. Gift transfers to individuals who are more than one generation younger, for instance, grandchildren are subject to a reduced rate (FA 1986 section 20 par 8). Transferring property into a limited partnership also helps to minimise the effect of inheritance tax. Assets in limited partnership have limited tax value and therefore reduce inheritance/estate tax. The beneficiaries will be catered for through the issuance of shares³⁹.

UK Inheritance Tax versus Four Maxims of Taxation

The four maxims of taxation help us to understand the suitability of inheritance tax law from a philosophical point of view. According to Adam Smith, the estate tax was in line with his first three maxims of taxation i.e. certainty, ease of payment and cost effectiveness in terms of collection. However, Smith felt that inheritance tax was against his fourth maxim of equality. According to him, a tax system should be fair to everybody in the society. The modern perspective of equity is based on two aspects-horizontal equity and vertical equity. Horizontal equity advocates for equal treatment of people within the same bracket both socially and economically. On the other hand, vertical equity calls for individuals in higher economic and social bracket to pay more taxes (except for benefit taxes where individuals pay in accordance with the benefit received.

Critics argue that inheritance tax violates the fourth maxim as it places a huge tax burden on the shoulders of the rich while exempting the poor through the nil band rates. However, supporters of the inheritance tax law are of the opinion that it is in line with the fourth maxim of equity. This is because people in the same socioeconomic bracket are treated equally and at the same time heavily tax properties above the threshold value. The rate charged is not constant and depends on a number of factors already been discussed.

Smith stresses that every citizen of a particular state should contribute towards the well being of the country in as much as possible and in accordance with their individual capability. For that reason, inheritance tax is unfair as it pushes the tax burden to the wealthy individuals while exempting the poor. The poor should also contribute even if it is at a lower rate.

Even though Adam Smith feels that estate tax is in line with the first three maxims. Many people will agree with him but only to a certain extent. According to the maxim of convenience, inheritance tax should be levied at the period or in a way that is okay with the contributor. According to the amended Inheritance Tax Act of 2007, Inheritance tax must be paid in cash seven months after the descendant’s demise. In many cases the benefactor does not leave liquid cash and therefore the beneficiaries are normally forced to sell the property in order to pay for the tax. Surviving spouses or civil partners are the only people permitted by the law to use business shares to set against tax on the inherited property or estate.

The maxim of predictability/certainty asserts that the amount of tax that an individual should pay must be predictable and not discretionary. This ensures that the taxpayers are well aware of what is expected of them by the government. The maxim of predictability also tries to eliminate any form of corruption from the revenue officers and tax evasion. Since 1984 changes in the UK inheritance tax laws has always been gazetted and the general public informed any changes. For instance, the government had increased the threshold level to £285000 for 2006/07, £300000 for 2007/08, and £500000 for 2009/10. However, the latter increase was revoked by the labour government and frozen until 2015. As a result, most of the UK citizens/residents know what is expected of them from the government.

As per the maxim of cost effectiveness, the tax collection cost must be lower than the amount of revenue generated from it. The taxation system should also be easy to administer. During the 18^th century estate tax was very easy to administer and was cost effective. What made the tax administration easier was the fact that it only targeted real estate owners. However, nowadays the tax bracket has expanded and includes cash, shares and securities among other valuables. Monitoring the transfer of these assets has proved to be very difficult and complex. In addition, the taxpayers have invented novel ways of avoiding inheritance tax. The UK government incurs massive expenses in terms of salaries and logistics to track such transfers and dealing with the defaulters, whereas the amount of revenue generated is very small (less than 1% of the total revenue). The analysis of the inheritance tax system using the four maxims of taxation fronted by Adam Smith still leaves us in a major dilemma on whether to continue embracing the system or abolish it.

Should inheritance tax be abolished?

Inheritance tax is not only unfair but also fetches little revenue for the government. According to the Financial Statement and Budget Report 2011, inheritance tax only raised £ 2.7 billion. This is less than one percent of the total revenue collected in that financial year. However, whilst the inheritance tax is not significant in terms of government revenue, it is fairly important economically. The opponents of the inheritance / estate tax argue that it wastes resources, discourages hard work and savings, and does practically nothing to bridge the gap between the rich and the poor. In other words, they regard inheritance tax as a total failure and should be abolished. To some extend they are right.

Contrary to the fallacy that inheritance tax is principally paid by the rich, they do not pay tax. As a matter of fact, the rich have been using estate-planning techniques to avoid inheritance tax. Some of the techniques used include life-insurance trust, generation-skipping trusts, and charitable trusts among others. According to John Beckert, a professor of law at Princeton University, the rich have devised new methods of avoiding inheritance tax to an extent that paying tax has become voluntary for them. He asserts that the amount of tax revenue collected at the moment is ascribed to the unresponsiveness of the taxpayers to the above loopholes or lack of belligerence on the part of the planners in exploiting avoidance opportunities. Other experts reiterate that inheritance tax is not a tax but a fine imposed on those who have not planned ahead or have hired unprofessional planners.

Nonetheless, the ability of the estate owners to avoid inheritance tax is not the same. This is because the methods used to avoid paying or minimizing inheritance tax are not cheap and take long to execute. Hence, those in a better position to undertake such plans are the large estate owners. In addition, individuals that have accumulated wealth for long are more conversant with the tax loopholes. For that reason, people who are most affected are those who have just acquired their wealth.

Inheritance tax reduces revenue that could be raised from a given property. The impact of inheritance tax avoidance techniques also affects other sources of government revenues, for instance, income tax. For instance, assets that have been transferred to a charitable trust are exempted from tax. At the same time, the beneficiaries are entitled to the income from the estate until they pass away. Transferring an estate to a trust not only shields it from inheritance tax but also minimizes the income tax. Economic experts argue that the lost income tax revenue from a property may compensate for all the revenue the government collects from it.

Sceptics of inheritance tax believe inheritance tax also have considerable impact on the general economy since it discourages people from work, saving and investment. The effective marginal tax rate for people saving money for their offspring is the income tax and the inheritance tax. This tax rate can go as high as 70 percent with other government taxes pushing it even higher. Economic experts claim that the negative impact of the inheritance tax is not limited to the rich alone. In addition, inheritance tax encourages gifts transfers during the lifetime and may discourage the beneficiaries from working hard and saving.

Intergenerational property transfer represents a huge part of a country’s capital stock. In other words, inheritance tax is a direct tax on capital stock. Thus, inheritance tax has negative impact on the capital stock formation and savings rate. Additionally, since wealthy individuals already own huge portion of the existing capital and are well versed on inheritance tax avoidance techniques, they may actually become richer. Last but not least, inheritance tax inflicts an additional cost on the economy. For instance, the government is forced to employ more revenue officers to keep track of property and gifts transfers. Furthermore, government has to hire a multitude of tax lawyers to take up cases of tax defaulters.

However, liberals acknowledge the flaws in the current inheritance tax law. They assert that the solution to the inheritance tax flaws do not lie on its abolishment but on necessary reforms. They add that abolition of inheritance tax may eliminate the existing flaws, but may also result in other serious challenges. For instance, it may eliminate what is so far regarded as the most progressive tax instrument in the country. Abolition could also negatively impact nonprofit organizations and state revenues as well.

Liberals propose replacing inheritance tax on assets and gifts given with taxes on assets and gifts received. This is practiced in a number of American states. Placing the tax burden on the recipient may minimize emotions/ moral outrage normally generated when the descendent dies. They also propose raising the threshold which will reduce the number of people paying taxes while taxing the “justly rich”, thus deconcentrating wealth. Closing the gaps in the current tax regime by treating different properties in a nearly analogous manner will minimize tax evasion, and therefore make inheritance tax collection simple and unbiased.

The reduced rates will also minimize cases of tax avoidance and behavioural changes. Indexing the nil-rate band will automatically keep the tax burden stable over a long period of time. The UK Government should also pass new laws to seal the loopholes in the Inheritance Tax Act, especially those related to real property transfers, for instance, pre-owned assets charge (POAC). POAC targets real estate property donated but the donor still derives benefit from it. If such violations are detected, annual tax charge should be imposed on the benefactor.

The best alternative to the inheritance tax system is the accession tax which has recently been introduced in a number of American states. Accession tax is a progressive tax levied on the sum of gratuitous receipts of a person during a lifetime. The accession tax tackles the liquidity and tax evasion than the inheritance tax. Accession tax exempts non-liquid assets on receipts but only when the beneficiary converts it into a liquid asset or changes its eligible use. Bonuses and other distributions from the asset are taxed apart from the reinvested profit. According to this system, the spouses are only exempted from tax after meeting certain criteria. It ensures no generational skipping of tax and unwarranted advantages over bequest. In addition, its timing is excellent and rational.

Other fundamental alternatives include taxing gifts as income, wealth tax along with differentiation and an annual wealth and accession tax (AWAT)⁶⁷. When gifts are taxed as income the rate will go down and will be well received by the citizens. Differentiated wealth tax means taxing wealth in accordance with the age and whether it is inherited or earned. The latter should be taxed at a higher rate. Lastly, AWAT merges wealth and accession tax and therefore lowers the rate of inheritance tax plus bridging the avoidance gaps.

Conclusion

Inheritance tax is a tax imposed on gifted/inherited assets. Generally, not tax system has ever been fair to the citizens but the current inheritance tax law has many flaws and is not fair to the citizens. The rates are very high and the rules are too stringent. These flaws are forcing the citizens to invent new ways of minimising the tax effect or avoiding it altogether. Critics call for the end of UK inheritance tax law. However, this could have a negative impact on the economy if an alternative is not found. For instance, the gap between the rich and the poor will continue widening and not extra revenue to the government. The current inheritance tax law can be amended to accommodate everyone and reduce the negative impact or the government can abolish it and introduce accession law which is more efficient than the current inheritance tax law.

Bibliography

Amended Inheritance Tax Act 2007

Amended Inheritance Tax Act 2010

Ascher, M L, “Curtailing Inherited Wealth”, Michigan Law Review, vol. 89, 1993, pp. 61-151.

Bayley, C, How to Avoid Inheritance Tax, London, Taxcafe, 2010.

Beckert, J, ‘Why Is the Estate Tax so Controversial? Journal of Sociology, vol.45, 2008, 521–528.

Beckert, J, Inherited wealth, Princeton, Princeton University Press Translated by Thomas Dunlap, 2008.

Bracewell-Milnes, B., “The Hidden Costs of Inheritance Taxation”, in Erreygers & Vandevelde (eds.), 1997, pp. 156-201.

Bnrtka, B, ‘Should We Abolish Estate Tax?’ Brief Analysis No. 20, Kirkby, Washington, National Centre for Policy Analysis, 1997.

Browne, J & R Barra, A Survey of the UK Tax System, IFS Briefing Note BN09, Oxford, Oxford University Press, 2012.

Csiszar, J, Pros and Cons of Inheritance tax, 2010, Web.

Dennis, H D, Inheritance tax pros and cons, 2011, Web.

Ely, RT, ‘The inheritance of property’, North American Review, vol.153, pp. 54-66.

Fabian Society, Wealth’s fair measure: The reform of inheritance tax, Fabian Society, London, 2003.

Financial Statement and Budget Report 2010, Web.

Finch, J & J Mason, Passing on: Kinship and inheritance in England, Rutledge, London, 2000.

Haslett, DW, ‘Distributive Justice and Inheritance”, London, Oxford University Press, 1997, pp.133-155.

HM Revenue & Customs, Inheritance tax (IHT) nil-rate band, Pre-Budget Notice PBRN16, 2007

HMRC, Inheritance Tax (IHT): spouses and civil partners domiciled outside the UK, London, HM Revenues and Customs, 2012.

HM Treasury Pre-Budget Report press notices PN 6, Tackling tax avoidance, 2003.

HM Revenue & Customs, Transferable nil rate bands, 2013, Web.

HMRC Inheritance Tax: Customer Guide, 2013, Web.

HMRC Inheritance Tax Manual (IHTM) 2012, Web.

Inheritance (provision for family and dependants) Act 1975 IHTA – Inheritance Tax Act 1984

Joulfaian, D, Estate taxes and charitable bequests by the wealthy, NBER working paper series 7663, Cambridge, NBER, 2000.

Macpherson v CIR (1988) STC 362

Nagel, T Equality and Partiality, New York, Oxford University Press, 1991, p. 12.

Osborne, G, Arguments for and against inheritance tax, Oxford, Oxford Brookes University, 2007.

Osborne, G, ‘Clear message to the middle class’, Daily Telegraph, 2007.

Rawls, J, Theory of Justice, Cambridge (MA), Harvard University Press, 2003.

Reynaud v CIR (1999) STC (SCD) 185

Seely, A, Inheritance tax, Standard Note SN00573, 2012.

Sheffrin, S M, Economics: Principles in action, Upper Saddle River, New Jersey, Pearson Prentice Hall, 2003.

Szydlik, M, “Inheritance and inequality: theoretical reasoning and empirical evidence’, European Sociological Review, vol. 20, 2004, pp. 31–45.

Tiley, J, Tileys Revenue Law, Oxford, Hart Publishing, 2008.

Tiley, J & Loutzeniser, G, Revenue Law: Introduction to UK Tax law, 5^th edition, Oxford, hart Publishers, 2012.

UK Finance Act 2005

The rules regarding the taxation of foreign and local based companies that engage in trade in two or more states has been consolidated through treaty law as a way to mitigate the possibility of double taxtion. The U.K. and Kenya have entered into such an agreement dubbed the double taxation agreement between Kenya and the United Kingdom. The agreement is also governed by the OECD Model Convention on taxation that provides the general rules of operation between countries that engage in trade with each other.¹

The tax treaty between Kenya and U.K. was signed at Nairobi on July 31, 1973 by Antony Duff (on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland) and Mwai Kibaki on behalf of the Government of the Republic of Kenya. The agreement came into force:

1. in the U.K. as respects income tax and capital gains tax, for any year of assessment beginning on or after 6 April, 1973 and as respects corporation tax, for any financial year beginning on or after April 1, 1973; and
2. in Kenya as respects income arising for the year of income 1973 and subsequent years.²

Formation of the real estate construction advisory firm, management and control issues, residency, taxation of profits

Stefan and Hans need to consider several policy and structural concerns that affect the creation and formation of the company in question. Hans is the majority shareholder of the company but does not have a majority stake in the company since he has only one third of the voting rights in the company. Stefano despite making a lesser contributuion to the company has a right to appoint a third director who he has appointed as his wife. This, therefore, means that he has a majority vote in the company.³

Under Article 18 any directors’ fees or similar remuneration derived by any of the two, Lucia and Hans, as well as the third director appointed by Stefan, will be subject to tax by the U.K. or Kenya depending on where the respective director or member of the board of directors is resident⁴. The Article specifically provides for the taxation of the benefits that accrue to the directors of a company for any services rendered by them to the company. The agreement provides that these incomes are to be taxed by the other contracting state if such board of directors is a resident of the other contracting state.⁵

Stefan, who is responsible for the daily activities of the company, will receive management fees arising from the operations in Kenya will be taxed in Kenya inline with Article 14 of the agreement that allows the management fees to be taxed in both countries. The Article provides that the tax to be charged in Kenya be limited to 12.5 percent of the company’s gross management fees if Stefano is to be taxed in the U.K.also.

On the other hand, if the management fees are not to be taxed in the U.K. then such fees will be considered as if they were from a permanent establishment in line with Article 5 of the agreement. The tax deductible from the fees will therefore be considered as though they were profits attributable to these establishments. In effect the agreement requires that the amount of tax that is to be deducted should be limited to 75 percent of the total gross fees. This falls in line with the provisions of the OECD convention in article 14 that was later amended by Articles 2 and 3 of the protocols.

The agreement cures the double taxation burden by providing that whether or not Stefan chooses to be taxed in line with Article 5 of the agreement, the provision for double taxation for purposes of relief shall still remain. The taxation in U.K.will, therefore, be considered as net of the management fees following the deduction of the relevant expenses that may have been incurred in relation to these management fees. This stand can be sharply contrasted with the courts decision in Bayfine UK Products v. Revenue and Customs Commissioners⁶

The consultancy and management fees that will be generated by the second assignment will be taxed in Kenya. Article 16 specificaly requires that the income that is generated by a resident of another state in respect to professional services that he may have offered to the other state is to be taxed by the home state. The employee who will be sent to the construction company in Kenya is assumed to be a resident of the U.K.and should otherwise be taxed in the resident and contracting state. The Article however povides for the exception that if such a resident has at his disposal a fixed base of operation that is meant to facilitate the undertaking of his activities and duties then such income will be attriubuted to a fixed base and therefore taxed by the other state. In the alternative, if the employee of the resident country continues to operate in the other country for more than 183 days in the fiscal year in question then the income he generates will be taxed in the country in question. The second assignment grants unlimited access to the employee for a period of 12 months which is more than 183 days and can be considered as income generated from a fixed establishment and will, therefore, be taxed in Kenya.

The greatest concern for the company and enterprise will be the manner in which the profits generated will be treated. The agreement requires that the profits of a company which resides in a contracting state be taxed by the resident or contracting state. The agreement, however, in Article 8 exempts any company that carries on business in a permanent establishment as in line with Article 5 of the agreement. The arrangement between Hans and Stefan provides for the creation and maintenance of the activities of the company in Kenya despite the formation and incorporation of the same company in United Kingdom. Article 5 specifically defines a permanent establishment as a fixed place of business in which the day-to-day affairs of the company are conducted. The arrangement between the two partners has allowed the main activities of the company to be run from Kenya. This can be construed to imply that the company intends that there be a permanent establishment in Kenya within the meaning of Article 5. This, therefore, means that all the profits generated from the operations in Kenya shall be taxed in Kenya.⁷

The profits that will be generated from the first assignment, however, will be taxed both in Kenya and the United Kingdom. Article 8 relating to business profits only requires the taxation of profits that are attributable to the fixed establishment alone otherwise, the rest shall be taxed at the place where they are generated. The construction contract in the U.K. will, therefore, generate profits in Kenya and U.K. and these shall be taxed as so in the measures and amounts in which they accrue. Article 8 further allows the company to make the relevant expense deductions for the costs incurred in the generation of the profits in the various countries. The amount to be taxed will also be determined on a year-to-year basis for the 24 months in which the contract will be in existence.⁸

The method of taxation and manner of apportionment of the relevant taxable income is provided for in the agreement. It allows states to adopt their own traditional methods of apportionment and taxation in the allocation and determination of the tax burden on the profits and incomes generated from a contract that is to be taxed in the two different tax regimes⁹. It, however, requires that the manner and approach that the state in question adopts in the determination of the income to be taxed should not conflict or go against the provisions of the agreement¹⁰. The profits that are to accrue to a permanent establishment on the other hand are not meant to include those of mere purchase of goods by such establishment for the purposes of the company. Any acquisitions made by the permanent establishment in Kenya for the purposes of the furtherance of the construction of the first assignment will therefore not merely entitle it to a share of the profits from the assignment.

The agreement (in Article 26) eliminates the double taxation that may arise in an assignment of this nature by providing that any such tax that may have been paid in Kenya by the company in relation to an income profit or gain that is to be taxed in the U.K., such tax shall be allowed as a credit to the taxation in the U.K. Article 26, therefore, gives a credit to the company of any taxation that it may have paid in Kenya for any such income or profit that is due for taxation in the U.K. The provisions in as far as dividend is concerned requires that the credit to be granted takes into account any such tax that is to be paid by the recipient of the dividend in specific relation to any other tax that they have paid. The agreement does not, however, provide for special forms of exemption from taxation in Kenya and any such application is to be made to the relevant taxation authorities in Kenya.¹¹

Sale of Shares

The gains attributed to the sale of shares can be considered as a capital gain to the company. Article 15 concerning the taxation of capital gains specifically requires that the gains from separable movable property that can be attributed to a permanent establishment are to be taxed by the state in which they exist in. On the other hand, any other capital gains that are attributable to properties other than movable and immovable properties are to be taxed only in the contracting state.

Article 26 also requires that where a resident in Kenya generates any income that can be attributed to sources within the U.K. and that falls within the various sources allowed by the agreement, such income shall be exempted from taxation in Kenya. This, however, will only apply to the extent of the income taxed in the U.K. alone and the remaining income is to be taxed at the normal Kenyan tax rate.

If on, the other hand, the income is derived from the U.K. and is to be taxed in both countries, then such income shall be allowed as a deduction in the calculation of the taxable income in Kenya only to the extent of the amount of tax that such an individual has paid in the U.K.¹²

Subsequently, the capital gains from the disposal of the shares of the construction company by the two directors will be taxed in the U.K. This amount will be exempted from taxation in the calculation of the taxable income of Hans by the Kenyan authorities.

The taxation regime in both countries is harmonized to allow and motivate stable and consistent business environment¹³. Double taxation exemptions plays a big role in ensuring that enterprises maintain a fair margin of profit and that they break even.¹⁴

References

Chisik, R and Davies, B. (2004) Gradualism in Tax Treaties with Irreversible Foreign Direct Investment. International Economic Review, Vol. 45, No. 1, pp. 113-139.

Davies, B. (2003) The OECD Model Tax Treaty: Tax Competition and Two-Way Capital Flows. International Economic Review.Vol. 44, No. 2, pp. 725-753.

Her Majesty’s Revenue and Customs (HMRC). (2011) Double Taxation Relief Manual (Kenya). Web.

Huber G, et al. (2003) Government Strength, Power Dispersion in Governments and Budget Deficits in OECD-Countries. A Voting Power Approach Public Choice, Vol. 116, No. ¾, pp. 333-350.

Shome P. and Schutte, C. (1993) Cash-Flow Tax Staff Papers – International Monetary Fund, Vol. 40, No. 3, pp. 638-662.

Weichenrieder, J. (1996) Transfer Pricing, Double Taxation, and the Cost of Capital. The Scandinavian Journal of Economics, Vol. 98, No. 3, pp. 445-452.

Ziliak, P and Kniesner J. (2005) The Effect of Income Taxation on Consumption and Labor Supply. Journal of Labor Economics, Vol. 23, No. 4, pp. 769-796.

Footnotes

1. Huber G, et al. (2003) Government Strength, Power Dispersion in Governments and Budget Deficits in OECD-Countries. A Voting Power Approach Public Choice, Vol. 116, No. ¾, pp. 333-350.
2. Article 32 of the Double Tax Convention between Kenya and the U.K. Web.
3. Chisik, R and Davies, B. (2004) Gradualism in Tax Treaties with Irreversible Foreign Direct Investment. International Economic Review, Vol. 45, No. 1, pp. 113-139.
4. Kanjee Nazanjee v Income Tax commissioner (1964) E.A 257 at 262 H
5. Her Majesty’s Revenue and Customs (HMRC). (2011) Double Taxation Relief Manual (Kenya). Web.
6. UK, SCITD 19 Nov. 2008, (cf. m.no. 12) were the income of a UK unlimited company was taxable both in the United Kingdom in the hands of the UK unlimited company itself and in the United States in the hands of the parent company of the UK unlimited company, since the latter was classified as a disregarded entity for US income tax purposes. The income of the UK unlimited company was thus attributed to different persons by the two states. The United Kingdom stated that double taxation relief is not to be granted to the UK unlimited company under the UK–US DTC.
7. Shome P. and Schutte, C. (1993) Cash-Flow Tax Staff Papers – International Monetary Fund, Vol. 40, No. 3, pp. 638-662.
8. Davies, B. (2003) The OECD Model Tax Treaty: Tax Competition and Two-Way Capital Flows. International Economic Review.Vol. 44, No. 2, pp. 725-753.
9. Kanjee Nazanjee v Income Tax commissioner (1964) E.A 257 at 262 H.
10. Unilever Kenya Ltd Vs Commissioner of Income Tax.
11. Unilever Kenya Ltd Vs Commissioner of Income Tax.
12. Weichenrieder, J. (1996) Transfer Pricing, Double Taxation, and the Cost of Capital. The Scandinavian Journal of Economics, Vol. 98, No. 3, pp. 445-452.
13. Unilever Kenya Ltd Vs Commissioner of Income Tax.
14. Ziliak, P and Kniesner J. (2005) The Effect of Income Taxation on Consumption and Labor Supply. Journal of Labor Economics, Vol. 23, No. 4, pp. 769-796.

Introduction

The revenue authorities make adjustments to the actual gross income based on deductions and requirements that cause changes to the level of annual taxable income. The deductions that are made serve to reduce the level of taxable income while taking into considerations changes that could have caused the individual to incur added costs that lower their income in the year. They include medical expenses, interests on the mortgage, and losses due to accidents or theft among others. The revenue standards have requirements for the categories of taxable and nontaxable income. The issues of accidents cause losses to an individual to the extent that the person may be disabled, experience job loss; incur medical bills, and other adjustments to fit in his or her condition after the accident. This kind of loss creates issues and impacts on tax since there are medical expenses incurred, home adjustments or capital expenditure to cater for the condition, reimbursement of insurance, and where the adjustments increase the value of the property creating the need for individual case assessment for tax purposes. This paper shall address the facts, issues, authorities involved in the given case study. It shall further seek to give recommendations all aimed at determining the number of medical expenses to be claimed by the individual.

Case Summary

Mr. Smith was involved in an automobile accident in the previous year injuring his legs. In the course of treatment, his physician recommends swimming as a daily routine for him. There being no public swimming facility readily available near his locality, he has the option of either building one in his backyard or buying a home equipped with a swimming pool. He opts to buy a home with a swimming pool in the current year for which he incurs costs for replacement of the swimming pool apart from the cost of the home. He also incurs maintenance expenses of the pool and other medical expenses, while the existence of the pool increases the value of the home to some extent. He thus seeks to obtain the amount of the medical expenses he may claim for tax purposes.

Issues Identified

The case of Smith raises several issues in tax. First, it is whether the recommendation for swimming by the physician of Mr. Smith forms part of the medical expenses liable as a deduction. The accident that Mr. Smith was involved in caused injury to his legs. He has maintained visits to his physician. The physician is the one who recommends swimming as a daily routine for Smith out of which the idea of the swimming pool comes up. The issue of concern is whether the swimming recommended by the physician is recognizable to the revenue authorities as a medical expense for tax deductions (Pope, Anderson & Kramer, 2009).

Another issue from the case is whether the costs incurred in the replacement of the swimming pool as well as the cost of the new home with the swimming pool are to be considered as medical expenses. It is worth noting that the option of buying a home with a swimming pool was preferred over building one in the original home. The swimming pool however is replaced and improved at additional costs. Another issue is the determination of the medical expenses to be claimed by Smith in the current year. This is because the value of the new home has been increased by the replacement of the swimming pool and other maintenance costs.

Facts Determined

The given case scenario represents an issue of medical expenses incurred after an event of an automobile accident. Mr. Smith is the one that was involved and has undergone treatment and therapy from his physician who recommends swimming to be a daily routine for Smith. The therapy process appears to have undergone a reasonable duration of time and so from the long-term relationship, swimming is an additional; therapy to enhance the healing and recovery of Smith.

Smith is faced with the options of either building a swimming pool in his backyard or buying a new house equipped with one out of which he chooses the latter. The costs involved in buying the home are given as $175,000, while additional costs of $20,000 are incurred for the replacement of the pool most likely for purposes of fitting in the condition of Smith. The other costs are routine maintenance of the pool at $500 and other medical expenses amounting to $1,800. The existing pool is estimated to increase the value of the new home by $8,000.

Location of Applicable Authorities

The most applicable authorities in this scenario include the tax court, claims court, or the district court in deciding the physician’s recommendation of a swimming pool for the taxpayer as well as establishing the number of medical expenses to be claimed.

Evaluation of Relevant Authorities

The courts address claims of medical expenses liable for deduction where the amount exceeds 7.5% of the adjusted gross income (Dickson, 2008). They offer jurisdiction in cases involving medical expenses to be claimed that are incurred and paid for in the taxable year. They work in conjunction with the relevant revenue authorities (Cch Tax Law Editors, 2007).

Analysis of Case Scenario

Physician recommendation: The recommendation by a physician for a therapy that would involve capital expenditure is considered if it is for the health benefits of the taxpayer, spouse, or dependants (Pope, Anderson & Kramer, 2009). The tax court relies on the intention of the therapy. In this case scenario, Smith was involved in an accident that has required him to undergo therapy for a long time. The recommendation is based daily and qualifies as for the benefits of the health of Smith. The tax court needs to establish that the recommendation is not to for the mere health benefit of Smith but the improvement of his condition.

Capital expenditure: The costs incurred for the replacement of the pool are liable as medical expenses if the replacement is to fit for the condition of the individual and exceeds 7.5% of the adjusted gross income (Cch Tax Law Editors, 2007). In this case scenario, the pool was replaced for $20,000 an amount that is likely to cater to the health condition of Smith. This amount exceeds 7.5% of his AGI which is $60,000. The tax court needs to establish that the replacement costs of the swimming pool are to cater to the health condition of Smith and not to adjust to his condition or for recreation purposes. In the case scenario, none of his family is indicated thus increasing the chance that the costs are all for his condition.

Medical claims of Smith: In establishing the medical claims for Steve, the tax regulations require that such claims for deduction must exceed 7.5% of the total adjusted gross income. Further, the improvements have to be for the improvement of the well-being while the cost of the permanent improvement has to exceed the value it increases to the property (Dickinson, 2008).

Determining the Medical Expenses of the Tax Payer

The gross adjusted income of Smith in this scenario is $60,000. The medical expenses to be included for adjustment are the costs for maintenance of the swimming pool amounting to $500, other medical expenses amounting to $1,800. The other expenses for the costs of the replacement of the swimming pool in the existing house of $20,000 and thus exceed the value it increases to the building of $8,000 (Pope, Anderson & Kramer, 2009). This means that the amount liable for claims is the difference of $ 12,000. The total cost of buying the new home is not liable for medical purposes since it is not for the health concern of Smith but acts as a home just as the previous one. The total medical expense liable for claims is $14,300.

Recommendations

The recommendation by the physician for therapy based on swimming as a daily routine serves to improve the health of Smith thus is liable for as a medical expense (Pope, Anderson & Kramer, 2009). The replacement cost of the swimming pool in this case scenario is for the benefit of Smith with the fitting of equipment and facilities to fit the condition of Smith. The medical expenses liable to be claimed for tax deductions should include the difference between the costs of pool replacement and the value it adds to the building, and other maintenance costs and medical expenses (Dickinson, 2008).

Conclusion

This paper has analyzed the tax scenario given it is about medical expenses to be claimed. The facts of the case have been determined with the identification of the main issues as the recommendation of the physician, capital expenditure and medical expenses, and the analysis of the authorities. Recommendations have been provided based.

Reference List

Cch Tax Law Editors. (2007). Federal tax compliance manual. New York: CCH Incorporated.

Dickinson, M. (2008). Federal income tax: codes and regulations. New York: McGraw Hill.

Pope, T., Anderson, K., & Kramer, J. (2009). Prentice Hall’s Federal Taxation 2010: Comprehensive. New York: Prentice Hall Publishers.

As evident by its name, executive compensation is a type of payment that chief executive officers (CEOs) receive for their work. Nowadays, its composition includes salary, annual bonus, restricted stock and option grants, payouts from long-term incentive plans (LTIP), and various perquisites (Edmans et al., 2017). Different views exist on whether CEOs deserve such benefits and much higher compensation than regular workers (Edmans & Gabaix, 2016). The “shareholder view” argues that they do due having a greater impact on firm value, while another perspective considers regulations and taxes as the determining factors for CEO payment (Edmans et al., 2017, p. 385). The latter point connects executive compensation and the issue of the new tax law, which affects several aspects of the former.

The legislation is under consideration is the Tax Cuts and Jobs Act (TCJA), and it introduces three significant changes pertaining to executive compensation. One of them concerns Section 162(m), and while the other two, excise tax and equity grants, are no less impactful, it deserves attention due to its scope and difficulty in response (Schneider, 2018). First of all, it alters the definition of a “covered employee,” to which a $1 million deduction limitation applies, extending it to corporate financial officers (CFOs) (Schneider, 2018). Overall, the CEO, the CFO, and the other three high-paid officers are subject to the regulation, and a person is considered a covered employee if they assume one of those positions in the taxable period (Schneider, 2018). Furthermore, once an individual holds office from December 31, 2016, the limitation remains in place for the future, even upon their resignation or death (Schneider, 2018). It could be connected to the mentioned perquisites, which offer benefits for retirement and departure from the company (Edmans et al., 2017). Thus, the TCJA considers previously untouched parts of executive compensation.

In addition to those rigorous changes in Section 162(m), two more are worth highlighting. One removes such exceptions for the deduction limit as performance-based compensation and commissions, meaning that they will count for the total amount (Schneider, 2018). The initiative may cause companies to stop designing and administrating those, although some will be able to decide whether they want to preserve the former as an exception (Schneider, 2018). Prior to the new tax, many structures were established to maintain the exceptional nature of performance-based compensation, but they may no longer be necessary (Schneider, 2018). Another change extends the Section’s range, which now covers domestic and foreign publicly traded corporations and some private ones (Schneider, 2018). It could discourage the latter from preserving integrity in their fiscal reports, considering the situation’s novelty. However, the updated tax rates may ensure that compensation losses are negligible, although they will be in effect only until 2026 (Schneider, 2018). Altogether, the discussed changes extend the taxation’s reach and eliminate some exceptions, which will make companies revise their policies regarding executive compensation.

As far as the TCJA is concerned, its impact on executive compensation appears palpable. Code Section 162(m) alone undergoes numerous major changes, from extending the deduction limitation to CFOs and retirees to including private companies within the regulation’s reach and reducing the exceptions to the said limitation. While the revised tax rates may alleviate the effect of those provisions, whether corporations will adjust to the new reality and manage to preserve the high officer position’s prestige remains to be seen.

References

Edmans, A., & Gabaix, X. (2016). Executive compensation: A modern primer.Journal of Economic Literature, 54(4), 1232–1287. Web.

Edmans, A., Gabaix, X., & Jenter, D. (2017). Executive compensation: A survey of theory and evidence. In B. E. Hermalin & M. S. Weisbach (Eds.), The handbook of the economics of corporate governance (pp. 383–539). North Holland.

Schneider, P. J. (2018). The impact of the new tax law on executive compensation. Journal of Financial Service Professionals, 72(3), 29-36.

Evidence shows that low-income countries collect significantly fewer taxes on their Gross Domestic Product (GDP) than high-income countries. In their article “Why Do Develop Countries Tax So Little?”, Besley and Persson try to find the reason for the matter by introducing a baseline model that aims at explaining the forces that influence taxation decisions and capabilities. The present paper offers a response to the article by discussing the major strengths and weaknesses of the arguments provided in the article and describing the implications of the findings.

The central question discussed in the reviewed article can be found in its title. The authors provide a systematic analysis of economic, political, social, and cultural behaviors to answer the question of why the taxation level in developing countries is low in comparison with developed economies. The authors argue that the central economic reasons for the matter are the ubiquity of informal and small-scale firms, international aid and resource dependence, and failure to modify the tax system by governments (Besley and Persson 109-112).

At the same time, weak institutions, fragmented polities, absence of transparency, weak sense of national identity, and a poor norm for compliance also determine the poor tax collection culture (Besley and Persson 113-117). The researchers justify their position using analytical reasoning, statistical analysis, and the opinions of experts.

The central strength of the argument is the holistic approach to the discussed question. The authors acknowledge that countries’ economies are influenced not by economic factors, but also by political and socio-cultural aspects. The provided baseline model considers the major characteristics of developing countries and draws direct and indirect links between the maturity of systems and taxation level. The evidence behind the claims is substantial, which implies that the strength of the argument and reliability of findings are high. Moreover, the model is applicable not only to developing countries; instead, it can be used to explain the reasons behind taxation patterns of all nations.

Despite having some distinct strengths, there are some weaknesses of the argument that should be acknowledged. As all baseline models, the findings cannot be applied directly to many real-world situations. In other words, while the tendencies described in the article are accurate on average, the financial performances of countries may differ considerably. For instance, the residuals in the linear regression model of the share of income taxes in revenue against the size of the formal economy are dispersed considerably, which implies a high margin of error. Therefore, economists can use the model only as a starting point for policymaking. In other words, before translating the model to practice, additional research should be conducted using the insights provided by Besley and Persson in the article.

When applying the baseline model, a policymaker should want to gain specific knowledge about the country of interest. The research should be based on up-to-date data to discover if the factors discussed by Besley and Persson have the same influence on the country’s economy and taxation patterns. The knowledge gained from the article can be used for creating hypotheses and borrowing methods for testing these hypotheses. After additional research is conducted, I would use the findings to determine the strengths and weaknesses of a reviewed economy and identify the most efficient places for interventions. These interventions would aim at increasing the amount of taxes collected in relation to GDP by addressing the problems in political, economic, cultural, and social spheres.

Works Cited

Besley, T. and Torsten Persson. “Why Do Developing Countries Tax So Little?” Journal of Economic Perspectives, vol. 28, no. 4, 2014, pp. 99-120.