The Internal Revenue Service (IRS) is the U.S public agency that collects taxes and implements tax laws. Since its inception in 1860s, IRS has grown relative to America’s population. IRS has processed many individual tax returns, especially in 2006, when it processed almost 134 million returns.
Nevertheless, the IRS, Sybase and other unscrupulous Americans have joined hands to implement a data warehouse called Compliance Data Warehouse (CDW). This warehouse has enhanced efficiency and more money is being collected from the taxpayers.
The data warehouse was important for the IRS because there were loads of accumulated information such as personal and tax information. Initially, the data was stored in older systems that were organized in many ways.
The data was stored in hierarchical mainframe databases, flat files or other relational databases. However, it was not easy to query and analyze data, especially from flat files, and that is why the IRS together with the group decided to implement the CDW, which allows flexible queries in the large database used in the whole world. CDW is a relational database and has billions or rows and many columns that contain complex links to many schedules.
The database enables the IRS researchers to search billions of records by use of a centralized source instead of multiple conflicting sources. CDW has enabled IRS to recover billions of dollars from the tax returns that was lost under the legacy system. The CDW is able to hold many terabytes of data and allow data access using many tools (Laudon and Laudon 252).
Despite the CDW having many benefits, its implementation was complicated, especially converting the old data to the new system since the data was not consistent.
In addition, persuading organizations to upgrade their system was not an easy task. Despite of all these challenges, the implementation was successful. After implementation, IRS got a 200-1 ratio of tax returns. The CDW also detected many mistakes in tax returns because it is able to determine organizations or people who cheat on taxes. CDW has reduced time to trace mistakes from eight months to just a few hours.
Data transportation was upgraded from using tapes to using a 2-terabyte network with attached storage applications. These storage devices are encrypted to make the data safe during transportation whereas the legacy tapes were not safe. Audits have proved that CDW is working well because it detects tax cheats. The IRS has minimized tax audits on honest taxpayers and has increased audits on the people whose tax information is at fault (Laudon and Laudon 252).
In essence, it was not easy to analyze the taxpayer data because there was no ease and speed in the way of detecting mistakes in tax returns. In addition, it was not easy to query and analyze data in the legacy system.
The technological challenge that IRS encountered was conversion of data from legacy to the new system because the structure of IRS data was not reliable due to its change from year to year. Management of data using CDW was another challenge because IRS had never handled such large amounts. Convincing organizations to upgrade their old systems and adapt to data warehouses was also a challenge and more so to government agencies.
Moreover, due to speed and ease with which the CDW was able to detect mistakes and cheats, it was easy for IRS to tell the people who are not honest with their tax returns. This enabled them to do more audits on information of such people and fewer audits on innocent taxpayers.
Other federal sectors where data warehouses are useful include justice, education, national aeronautics, space management and departments of defense. The data warehouses are useful in these sectors because they are used to detect fraud, abuse, evaluate research and scientific information, detect illegal activities and criminal patterns and detect terrorist tricks or activities.
Work Cited
Laudon Kenneth and Jane Laudon. Management Information System: Managing The Digital Firm. 11th ed. Upper Saddle River, NJ: Pearson, Prentice Hall, 2009. Print
Recently, American citizens have witnessed a tendency of rising taxes (Blodget 1). This issue of rising taxes seems to have gained momentum, especially after the financial recession of 2008. Today, many Americans are concerned about the increasing tax levels.
The issue of huge taxes can be associated with the reason as to why many people in USA are currently struggling in their daily lives, as they try to make use of decreasing disposable income. If one was to interview many Americans on the issue of taxes, there are high chances the response would be ingrained in the overall perception of how huge the tax problem is inflicting on Americans.
A random survey of major USA households will likely reveal that a large number of people cannot afford basic needs; many people are loosing their homes because of taxes; and many people have accumulated huge debts as a result of high taxes. On overall, the spirit of entrepreneurship among Americans seems to be stifled by the ever-increasing taxes, and this makes it hard for many people to succeed in business.
As it stands today, the issue of rising taxes is a problem that should not be given a blind eye (Blodget 1). There is need to enact changes that will result into change of the tax system and be more accommodative and less cruel to majority of Americans. This problem cannot be ignored, given its medium and long-term repercussions. The future of many Americans may be compromised, become bleak, and largely intolerable if the current tax system is not reformed appropriately.
Increased taxes are perceived to be detrimental to the growth of economy in the sense that, increased taxes on income discourage majority of people from working, more so due to the fact that, they work a lot, pay much in taxes, and remain with little (Cohn 1). At the same time, as taxes paid by major manufacturers and industries increase, there is subsequent tendency to transfer the increased tax to basic commodities, a fact that discourages people from buying the commodities.
This operates in a cyclic form, where increased taxes affect industries, and when industries feel the pinch, they pass the ball to consumers; when consumers find it impossible to cope up with the high prices of commodities, they reduce their purchasing power and when this happens, the larger economy becomes a victim, as it stifles and underperforms.
However, as the issue of taxes draws reactions and far-fetch cry for reduction of taxes, another school of thought believes that reduction of taxes will generate numerous negative impacts to the American society. The line of argument on which this school bases its argument is that, taxes are needed to propel social welfare, and when taxes are reduced, then the society is likely to suffer (Cohn 1). Reduction of taxes will compromise the future generation, as many will have a difficult society to live, and they cannot afford basic social essentials.
Further, reduction in taxes will result into massive government budget cuts with regard to essential government programs such as the Medicare and Social Security, and this will be dangerous to the American society (Cohn 1). Therefore, the issue of enacting reforms to reduce taxes to manageable levels for majority of Americans is considered not to be the best option by this school of thought.
There are numerous avenues through which this issue of high taxes can be tackled and bring relief to majority of Americans. For instance, as the situation stands, many businesses are either crumbling or failing to be established, and in some instances, majority of American investors are relocating to ‘friendlier’ areas, thus, denying Americans employment opportunities.
As this happens, the rich remains the biggest financiers of bloated government programs, and, as this trend continues and persists, there is possibility for the wealthy class to shrink in America and, subsequently, wealth creation will be avoided and hence crumbling majority of government programs.
The most important thing for the government is to open the door for a business-friendly policy that largely encourages investment and wealth creation. Such a policy should determine how taxes for various business groups should be applied on relatively accommodative tax reforms.
When this happens, numerous companies willing to leave the industries will be enticed to stay and participate in wealth creation. The establishment of more indigenous industries will provide employment for many Americans, enabling the middle class to possess more income and able to pay taxes.
What the government will do is that instead of concentrating high taxes on a particular segment of population, tax prospects will be spread across a wide group making it possible to reduce taxes as more people become eligible to pay taxes. This approach should be accompanied by reasonable government spending restraints to be more effective. Indeed, this will largely reduce the deficit and enable the economy to recover.
Another area that needs redress in order to spur growth of employment and subsequent reduction in individual taxes is the American property industry. The overall observation that has been made is that it is another area where taxes have skyrocketed pushing investors and potential investors outside the key areas of USA (Tuttle 1).
As many investors leave the country, unemployment rate gradually increases while at same time, wealthy and rich people’s contribution to tax reduces. It should also be known that American economy thrives on small businesses, which are the greatest contributors to national tax kitty.
Therefore, when property industry becomes expensive, majority of these small businesses opt to relocate or reduce their trading activities (Tuttle 1). When this happens, the impact is huge, and evident in key aspects such as reduction of employment opportunities, increase in number of unemployment benefits, and little contribution to national tax kitty. Therefore, it is just prudent for effective and efficient property tax reforms to be enacted.
The issue of raising tax for the rich and middle class population remains emotive among different spheres of population; however, the denominator of all these is that, a rise in taxes creates an immense burden to larger American society.
The society cannot progress at an accelerated speed if high taxes persist, as this tends to push investors and rich people to other regions. As investors move, the middle class employment opportunities reduce, while at same time burdening the social welfare programs for the unemployed people due to reduced taxes.
Therefore, given the immense negative effects high tax are imposing on the nation, there is need for establishment and implementation of a comprehensive tax reform framework that is more business friendly. Indeed, it is only through increased business activities that the economy of the country will grow and distribution of tax pay will be more even and widespread, hence gradually moving down.
Raising taxes will not help especially given the shrinking number of rich people and middle class employees. Instead of just fixing eyes on the tax, it would be advisable if necessary steps were undertaken to stimulate economic growth, reduce government spending, and exploit more energy resources available in the country, which will subsequently contribute to economic growth, hence less taxing from people.
It is a well known fact that taxation is the lifeline of a nation. The US taxation system creates the mechanism for collecting funds that can be used to sustain and improve basic services (Barber 10). Roads, schools, hospitals, are built and law enforcement agencies are maintained through the efforts of the Internal Revenue Service.
Employees, professionals, and businessmen must pay taxes so that Americans can sustain a certain way of life. Nevertheless, it is common knowledge that a significant amount of taxes are collected from corporations (Schmitt 15). But it can be argued that many multinational corporations have found a way to reduce the amount of taxes they are supposed to pay the government through the use of tax havens.
Multinational corporations through the help of financial advisers are able to exploit legal loopholes so that they can shift profits and move funds from the parent company to subsidiaries located in countries designated by tax authorities as tax havens. It is detrimental to the US economy if corporations are allowed to evade taxes. However, there are incentives on both sides to continually use tax havens and this will be discussed in the following report.
Pass the Burden
Corporations are entities that in recent years have become as powerful as local governments. The money and political clout of many multinational corporations allowed them to increase their profits while drastically reducing their operational expenses.
A closer look at some of the world’s top multinational corporations will reveal a common trend that can be reduced to three statements:
the world’s money, technology, and markets are controlled and managed by gigantic global corporations;
corporations are free to act solely on the basis of profitability without regard to national or local consequences; and
there are no loyalties to place and community (Korten 133).
As a consequence economists and concerned citizens have observed a disturbing development with regards to corporate greed, because for many corporate leaders, sustainability is a problem of the next generation. As a result the following observations had been a focal point of discussion in many sectors. The following information has long-term consequences that have to be addressed sooner than later:
IN 1957, corporations in the United States provided 45 percent of local property tax revenues. By 1987, their share had dropped to about 16 percent. A 1994 study by the Progressive Policy Institute of the Democratic Leadership Conference identified what it considered to be unjustified subsidies and tax benefits extended to corporations in the United States amounting to $11 billion over five years … the largest corporations are paying less taxes and receiving more subsidies (Korten 133).
One way to reduce the amount of taxes normally paid by a US-based corporation is to transfer operations abroad. In the case of many giant firms the cost of transfer is cheap because they simply crossed the border that separated the US mainland from South America.
In most cases it requires a few hours of travel time for corporate leaders to move from company headquarters to their maquiladora plants in Mexico. Compared to the amount of taxes they have to pay if they stayed in the United States, corporations benefited from tax exemptions as investors in a foreign land (Korten 132). However, this is nothing compared to other strategies employed by multinational companies to increase their profitability and at the same time lower the amount that they have to pay in terms of taxes.
It is a common refrain among strategists and analysts to share the burden, so that the greater the number of stakeholders carrying the burden the lower the risks involved. But corporations have found a way to share the burden to others without giving anything in return.
According to economists, “about half of corporate taxes fall on investors in reduced dividends and share prices, and the other half falls on labor in reduced wages and increased prices” (Gloor 1). This is made possible by a legal loophole wherein corporations are only required to pay dividends after taxes had been deducted from the profits.
Furthermore, the taxes that the government levies on products and services simply increase the price that consumers have to pay. The taxes that are supposed to be paid by employers and employees in the form of income tax is to be shared by both employer and employees, but in reality it is the employees that are paying for that particular amount.
However, this is just the beginning because multinational corporations are aware of other schemes that can significantly increase their profitability and of which is the use of tax havens outside the United States.
Tax Havens
According to the Congressional Research Service there is no precise definition of a tax haven although common features of a country that can be considered as a tax haven are listed as follows:
enables a company to pay low or zero taxes;
lack of effective exchange of information;
lack of transparency; and
no requirement of substantial activity (Gravelle 2).
A major loophole in the US taxation system that enables the proliferation of tax havens is the rule that a multinational corporation’s income will not be taxed if this was earned through the activities of a foreign subsidiary. The only time that the US government can tax this income is if the profit is repatriated back to the parent company in the United States. Thus, a corporation can simply replicate itself in another country wherein the local government finds it advantageous to become a tax haven.
The aforementioned loophole is made more effective by two features of a tax haven. First of all, most tax havens do not impose taxes. This feature is especially true in a country wherein most of the residents are poor. Thus, government officials find it impractical to collect income tax. In most cases tax havens impose low rates of tax as a form of incentive to attract investors (Gordon 15). The second important feature of tax havens is secrecy.
The high level of secrecy is based on common law and can therefore be considered as a legal loophole. According to legal experts, common law secrecy is derived from “the finding of an implied contract between a banker and his customer that the banker will treat all of his customer’s affairs as confidential” (Gordon 15). It is therefore convenient to use tax havens as an effective means of tax avoidance.
A euphemism for secrecy is privacy and this is also a byproduct of a legal loophole that allowed tax havens to copy the famous Swiss numbered bank accounts and profit from this endeavor. In a Swiss numbered account “the identity of the account holder is only known to one or two bank officials” (Sharman 25).
It is very convenient and at the same time offers the highest form of protection from antagonists desiring access to this valuable information. The system is made more effective by a law that ensures heavy prison terms for bank officials and financial professionals who will divulge this type of information to third parties. In addition, tax haven countries usually do not collect taxes and therefore it is not a crime not to pay taxes.
Thus, authorities residing in tax havens do not have any legal obligation to cooperate with investigators regarding tax evasion cases (Sharman 25). There is therefore a great deal of incentive to move funds to banking institutions that offer a form of tax shelter outside the United States.
The United States government taxes “all income earned in its borders as well as imposing a residual tax on income earned abroad by U.S. persons” (Gravelle 7). However, a multinational company can shift profits from the US to a country known as a low-tax jurisdiction. As a result this particular firm can significantly reduce the taxes that it has to pay to the Federal Government but its operational efficiency remains intact. Therefore, firms can greatly benefit from the artificial shifting of profits.
According to the US PIRG Education Fund, in the course of a decade, “an estimated $1 trillion in revenues is lost due to the use of tax havens and the government must make up for this shortfall” (Tichon 2). This is a two-edged sword hurting the economy in two ways.
The significant losses in revenue means that the government cannot provide adequate services such as education, healthcare, and much needed infrastructures. At the same time the government will be forced to increase taxation in order to lessen the budget deficit. It is therefore to the best interest of the people for tax havens to be abolished completely. But upon close examination it is not beneficial to the US government and for the US economy to go after erring multinational corporations using tax havens.
Impossible Task
It is the moral responsibility and the legal right of the IRS to go after tax evaders. The avoidance of taxation cannot be justified especially if ordinary citizens are forced to pay taxes under penalty of stiff fines or imprisonment.
If one considers the disparity of income of individuals or small businessmen in comparison to the millions or even billions of dollars of revenue enjoyed by multinational companies then it is easy to be outraged by the use of tax havens. It is of critical importance to identify multinational corporations that utilize this scheme as well as tax havens that encouraged this kind of practice. However, it was found out that the total eradication of tax havens is detrimental to the overall US economy.
In a globalized economy US based firms are faced with mounting pressure to lower cost and increase profitability. It is therefore the responsibility of the US government to help these firms succeed.
The following reasons explains why there is ambivalence when it comes to the creation of strong policy that will discourage the use of tax havens and these are listed as follows:
the need to maintain the competitive position of US businesses that are investing abroad or exporting overseas;
the need to maintain tax equity as between investment in the US and investment overseas;
the need to provide fair rules for taxing foreign investment;
the need for efficiency; and
the need to consider foreign policy (Gordon 42).
It is important to point out that US businesses must be given an incentive to develop operations abroad. Naturally, these firms will choose to build in a region that offers low tax rates.
The US government cannot radically alter current laws to dismantle tax havens because doing so can reduce the competitiveness of US firms exporting products to countries that can also be considered as tax havens. A rigid implementation of rules can make it impractical to continue doing business outside the US. It is also important to avoid double taxation.
It is also imperative that the US government must encourage foreign investment and if these foreign corporations enjoy a certain type of tax deferment scheme, then the US government cannot impose a double standard by insisting that other nations cannot use the same strategies to entice foreign investors. There is also a great incentive to maintain a high level of administrative efficiency.
Conclusion
It is important to eliminate tax avoidance such as the practice of using tax havens as a way to significantly reduce the taxes that a corporation must remit to the US government. The proliferation of tax havens is made possible by the exploitation of legal loopholes.
These legal loopholes on the other hand are a direct result of the need to maintain competitiveness in a highly globalized economy. Therefore, the US government can intensity its drive to reduce lost revenue through tax avoidance but it is impossible to totally eradicate the use of tax havens. The United States have to respect the sovereignty and independence of other countries.
At the same time the elimination of the protocols that enable the existence of tax havens also means the removal of the competitive advantage of US firms that benefit from the low tax rates offered in these countries. Thus, US firms will be at a disadvantage because companies in Europe and Asia use the same strategy. It is also impossible to break the client confidentially agreement utilized by account holders and therefore they are shielded from tax investigations.
Works Cited
Barber, Hoyt. Tax Havens Today: The Benefits and Pitfalls of Banking and Investing Offshore. New Jersey: John Wiley & Sons, 2007.
Gloor, Peter. Fundamental Tax Reform and the Case for a Net-Worth Tax. Fair Share Taxes, 2009. Web.
Gravelle, Jane. Tax Havens: International Tax Avoidance and Evasion. Congressional Research Service, 2009. Web.
Gordon, Richard. Tax Havens and their Use by United States Taxpayers: An Overview. New York: Books for Business, 2002.
Korten, David. When Corporations Rule the World. CT: Kumarian Press, 2001.
This essay will look at the effect of a change in tax rate in an economy. Based on the current economic and financial crisis relationships with be established on taxation with work incentives, labor productivity, investment decisions, budget and the rich so as to make informed opinion.
When an economy is facing a crisis, it adjusts its tax system as policy to rectify the deficit in the economy. For instance, United States has been hardly hit by the economic crisis and is contemplating on increasing taxes for the rich. The change in taxation has both positive and negative effects.
Introduction
The current economic and financial crisis has adversely affected all the countries in the world. Those that have been hard hit by the crisis include the United States of America and European countries. Other countries, especially developing countries are suffering from the spill over effects. In United States, the effects of this crisis have been evident in various sectors of the economy.
The country has been hit by high rates of employment with nearly ten million people registering for the unemployment benefits. The number of people registering in job search centers has increased, with fresh graduates taking the highest percentage. The economy has failed to create new jobs, with jobs lay off mounting by the day. Most industries are streaming their workforce since they cannot adequately meet their needs, such as paying salaries and other benefits.
The situation has rendered a high percent of the populace jobless, with most of them having difficulties in paying their bills. Those who are unable to meet their bills have resorted to pegging in streets so at least to get something to sustain them. The suffering of most Americans has not gone unnoticed, with the President Barack Obama constantly giving an account of government progress on how the crisis is being handled. The most recent announcement by the President is an increase in the rate of tax for the rich.
The tax raise among the rich will lead to an increase in national revenue that can then be used to create jobs at national levels. This move has elicited controversy, with some supporting while others attack the move as inappropriate. It is like taking from those who are rich and distributing it to those who are poor. Despite raising taxes for the rich, taxes for foreign people should be lowered.
Discussion
Taxation is a fiscal policy tool that government can use in order to have a balanced fiscal budget. The government to attain certain objectives like full employment, price stability and economic growth normally uses fiscal policy. Other policy tools that can be used include printing of money, sell of fixed assets, internal or external borrowing as well as consumption of fiscal reserves.
When a government is facing huge deficits, tax revenue can be raised by increasing the tax rates. Taxation is a tool that can be used to rescue an economy facing difficult times. Proper design of a tax policy can be a panacea to the prevailing economic hard times such as unemployment. United State has sought to follow Germany’s way to rescue its economic from adverse effects of its current debt position.
Economist asserts that the only way in which an economy can reverse a crisis is using an expansionary fiscal policy. This will solve the issue of fiscal budget imbalance, unemployment and ‘crowding out’ effect.
Conversely, high taxes will look out private companies from investing in the country because of the cost of production which will translates to higher commodity prices. It will be hard for businesses to carry out business in countries with high tax rates. This is because it will render most establishments less competitive in the global market.
To encourage foreign investment tax rates should be reduced for them and sometimes coupled with tax havens, allowances and subsidies, this will encourage them to take up their new investment in the economy (Kivel, 2002).
Taxation and work incentives
When there is an increase in the rate of income tax, the effect will be that the post-tax income of individuals will reduce. This is because the net income resulting from each hour of work will be lower. The move might encourage workers to increase their number of working hours to meet their target income. On the other hand, an increase in tax might be used as a disincentive to promote less work. The government normally sets a lower income tax rate for low-income employees.
This will act as an incentive for workers to do their job for long hours and earn more money. Low taxes on low-income earners serve as a tool of reducing ‘poverty trap’ risks where individuals will get high net financial benefits from their work. When tax reforms are favorable, it leads to an increase in supply of labor thus a reduction in unemployment equilibrium rate hence, the growth rate will increase.
Taxation and the pattern of demand
Demand patterns for goods and services vary as indirect taxes are changed. When value added taxes (VAT) on commodities such as alcohol and cigarettes increase, it is aimed at causing a low consumption among consumers or a substitution effect. The result will be a low demand for such commodities. Indirect taxation can be applicable where there is a total market failure, as well as when the government wants to ensure equitable distribution of resources such as health care.
Taxation and investment decisions
When the rates of business taxes and corporate tax are low, this can stimulate a business to increase its spending in fixed capital investment. An increase in investment will mean that the capital stock of a nation has increased thus an increase in capital stock of every worker employed (Mankiw, 2011).
Government can use incentives such as tax allowances to boost research and development and in encouraging new business developments. A tax regime that is favorable will attract increased inflow of FDI (Foreign Direct Investment). This will be a stimulus that will benefit an economy’s aggregate supply and aggregate demand. Low rates of corporation tax will attract huge amounts of private investment.
Tax changes act as a stimulus of investment in capital assets, social infrastructure, and labor force skills as well as in technology. A good tax system will ensure an improvement in infrastructure, which is essential for economic growth through increased production and competitiveness. Government spending can be terms of development of an education system that is skills oriented and technology focused. This will ensure a steady long-term supply of human resources (Dye, 2011).
Company’s risk attitude and corporate income tax are the main factors that are considered by an organization before making an investment decisions, this is because this factors can affect the rate of return on investment. Amount of corporate tax to be paid is an important factor that is taken into consideration before making a financial investment decision. This is because low taxes will mean lower prices for goods and higher revenue generated.
The Rich Should Pay More
For equal sacrifice and fairness among citizens, those individuals who benefited from favorable economic times such as boom, rescue packages among others should find it necessary to shoulder the costs that arise from a crisis. There willingness will save the economy from suffering the worst effects of a crisis that a time may spill over to drain resources of the rich. This argument looks at increasing government revenue through an increase in income as well as an increase in capital gains tax.
This was illustrated by Germany’s case after the World War II where legislation was passed which mandated financial compensation to gather for loses that arises during the war. This lead to a creation of tax on property and capital, this law was applicable to individuals who still possess substantial assets after the war. The law required them to pay half of their asset worth to a compensation fund over a period of thirty years.
In case of United States, an increase in tax has no chance any time soon. The reason being the required budget consolidation should occur on the expenditure part. This will imply a reduction in government expenditure and this will have adverse effects on the economy. On the other hand, an increase in income tax disproportionately has an effect on higher earners. The impact of high tax on the rich is minimal because large proportions of their income go to savings while minimal amounts are spent (Blinder & Baumol, 2011).
United States cannot undertake spending cuts since it will adversely affect their growth. This is because the economy is spending less on infrastructure, education and social transfers. For other countries that are facing similar crisis, an increase in government revenue will serve the country better. Therefore, if Americans refuse to contribute more to their economy through tax, they will suffer from a middling economy.
Conclusion
Taxation as an expansionary fiscal policy is applicable when an economy is facing difficult economic times, where the government spending exceeds its revenue significantly. The current financial and economic crisis has led to increase of tax rates to generate more revenue.
The revenue generated is ploughed back to the economy to offset the high standing levels of debts. Increased tax will hurt the economy in terms of reducing the disposable income of consumer and investment income for companies. Individuals will be left with insufficient money to spend hence a decline in aggregate demand. The rich should make a greater sacrifice to shoulder the costs that have accrued due to a crisis as the low-income earners still pay their tax at the usual lower rates.
Poor economic standing of an economy will imply that sectors such as education, health care, communication, physical infrastructure among others will suffer, yet they are the main drivers of economic growth. A good tax system should be developed to realize economic progress.
Good taxation we stimulate accumulation of capital stock in the economy in terms of new industries being set up and new technology adopted. This will ensure that the rate of unemployment reduces with a significant margin. Increase the tax rates for the rich will increase the revenue base of a country with the money generated channeled towards job creation in the economy.
An economy in a crisis should receive compensation from those who benefited from it during good times such as times of rescue package, social transfers and boom. The wealthier should make huge sacrifices in terms of tax payment even though the burden may be overwhelming. A good tax system should act as a magnet for attracting foreign investors through the provision of tax haven for newly established industries. This will encourage foreign investors in the country; hence help in solving the problem of unemployment.
References
Blinder, A. S., & Baumol, W. J. (2011). Macroeconomics: Principles and Policy. New York: Cengage Learning.
Dye, T. R. (2011). Understanding Public Policies (13th ed.). Boston: MA Pearson.
Kivel, P. (2002). Uprooting racism: how white people can work for racial justice. New York: New Society Publishers.
Mankiw, N. G. (2011). Principles of Economics. New York: Cengage Learning.
Confidence in tax system can be maintained if every person and company pay their fair share tax. However, some multinational companies pay little tax despite their huge amounts of returns. In addition, some businesspersons manage to use wrong schemes to avoid paying taxes.
The companies may use legal and illegal ways to avoid taxes. Multinational companies enjoy vast benefits and are obliged to pay their share of tax. Tax evasion and avoidance has been a major concern in government. In international trade, multinational companies use tax havens to avoid paying taxes.
Some of the tax-avoidance techniques used can be legal, while the others are illegal. For example, government is convinced that Vodafone Company was freed from the duty of paying vast amounts of tax by HM Revenue and Customs (Vanessa & Holt, 2012). Tax avoidance is a serious threat to the ability of tax system to adhere to code of ethics in democratic nations. Therefore, tax avoidance by multinational companies is morally wrong.
Justification to tax avoidance
Multinational companies have justified their reasons for tax avoidance. Tax directors in multinational companies claim that the task is not easy and involves great deal of time. The complicated tax systems, legislation and tax laws from every nation are some of the reasons which make the process tedious and time-consuming. A director of Dutch multinational company specializing in bulk logistics claims that tax avoidance saves money.
As a result, the shareholders will have a net profit and therefore appreciate the company (“The missing $20 trillion”, 2013). These companies maximize the shareholder value, thus gaining more customers: the main reason for tax avoidance and evasion. For example, Starbucks failed to pay UK corporation tax; however, it transferred the money to one of its branches in Dutch to make royalty payments in 2011. Moreover, these companies exploit tax havens to hide their profits and avoid taxes.
Instead, the money was spent in making up for the lost revenues and buying more stock. For example, in 2011, Starbucks bought coffee from Switzerland after avoiding corporation tax (Vanessa & Holt, 2012). In addition, these companies claim they invest a lot of money in corporate social responsibility events. Multinational companies hope to gain profit from these events; however, they claim it is not possible unless they avoid tax (“The missing $20 trillion”, 2013).
As a result, these companies reduce their liabilities, and therefore, their benefits are maximized. Furthermore, the companies claim that some tax laws undermine capitalism; which they support. Another justification to tax avoidance is that tax directors believe that there is no moral responsibility in avoiding tax. They claim it is a method of reducing bills by a few pounds and investing the money elsewhere (“The missing $20 trillion”, 2013).
They claim that avoidance is legal, while evasion is illegal, thus tax avoidance in multinational companies is justified. This means that it is difficult to see the difference between tax avoidance and acceptable tax planning. Tax director in Google adds that international laws on tax should be revised to reduce the total tax of a given multinational company. In addition, he is convinced that the amount the multinational companies are paying for tax is much.
Tax avoidance robs public service
In 2011, Starbucks had sales of £400m, but paid no taxes (Vanessa & Holt, 2012). Tax collected in a nation is used to improve existing structures as well as develop new ones. Tax is also a moral issue, and governments are committed to end tax avoidance and evasion. Tax is a valuable resource in economy of a country and failure to pay tax may result in deflated economy and bank bail outs. This means that the banks will be at risk of being bankrupt.
Morality, integrity and responsibility are essential aspects in tax fairness, thus every person and company ought to pay a fair share of tax (Vanessa & Holt, 2012). The form of taxation applied in the United Kingdom is progressive taxation. In progressive taxation, the amount of tax is directly proportional to income. For example, Starbucks and Google collect vast amount of benefits, yet they pay less corporation tax than expected (Vanessa & Holt, 2012).
This means that they act morally wrong evading their duty and responsibility to a country. In addition, those who avoid tax still use public services which mean they are putting more pressure in government. Tax avoidance negatively affects the services offered by government.
Governments cannot defend the public interest appropriately. For example, the public is in need of quality health care, and government is obliged to provide for it. However, it is pressured because it lacks enough revenues to cater for its citizens. Tax avoidance affects the economy and self-reliability of a nation. It is morally wrong for these companies to negatively impact the economy of a nation by avoiding tax.
Through taxation, a government is able to collect revenues which can be used to improve the living standards of its subjects (“The missing $20 trillion”, 2013). This means that teachers, doctors and other public servants will have a good pay and better living standards. Equality is an important aspect in regard to the income tax and law. Individuals pay tax because they believe it is morally right. However, multinational companies fail to pay their fair share. This means that the value of equality is not met, and it is morally wrong.
Paying taxes is legal
Tax avoidance is not morally justifiable. Corporate tax directors have ruled out that it is illegal to avoid tax. For example, Starbucks and Google collect large amount of money out of their business activities. They run their businesses in many countries in the world.
For instance, to operate in the United Kingdom, the companies have a fair share which they are supposed to pay the government off as per the agreement.In addition, the UK exercises tax laws and international tax laws which govern the businesses (The price isn’t right”, 2013). This means that tax avoidance is a breach of the agreement and tax laws.
As a result, it is illegal to avoid tax. Paying taxes is a legal process, and multinational companies ought to pay their fair share of tax. It is believed that only ‘little people’ pay taxes (“little” in sense that their salary is less compared to benefits of multinational companies). In addition, some employees in multinational companies and rich individuals avoid tax (“The missing $20 trillion”, 2013). It is an act of selfishness for a company to collect benefits and pay less than it is required.
Moreover, it is illegal to devise ways of minimizing benefits in order to avoid tax as it is done by many multinational companies (“The missing $20 trillion”, 2013). In addition, the companies fail to contribute to the societies where they operate. It is important for multinational companies to pay their taxes to respect rule of law of a given land. Tax avoidance undermines the democracy of a country.
Nations should be able to cater for the needs of the citizens, and as a result of tax avoidance, many nations struggle to function appropriately. Countries lose revenues through illegal schemes in tax avoidance (“The price isn’t right”, 2013). To ensure equity in payment of taxes, governments need to address the challenges existing in taxation system. Organized schemes to avoid tax raise concerns about the credibility of tax collecting bodies and their systems.
Conclusion
Paying taxes is morally right and multinational companies should participate fully in the process. Democracies need to develop a country’s infrastructure and improve existing ones.
Governments need to provide adequate and social amenities to its citizens. To accomplish all these, governments need money for development. Taxation is one of the major avenues through which a government collects revenues (“The missing $20 trillion”, 2013). There is need to pay taxes to facilitate development activities in a nation. Tax avoidance robs public service (Vanessa & Holt, 2012).
As multinational companies maximize their benefits, they should also bear responsibility for the nation to pay their taxes. Paying taxes ensures constant supply of revenue to the budget, thus decreasing the incidents of bankruptcy in the country. In addition, a country is able to maintain its revenues (Vanessa & Holt, 2012). It is a legal responsibility to pay tax because there are laws governing the exercise in a given nation.
Paying corporation tax is important for a healthy relationship between the company and the society where it operates. Government ought to address the issues in taxation system in order to make rich individuals and multinationals responsible for paying tax (“The price isn’t right”, 2013). Transparency is one of the ways of addressing tax evasion by multinational companies. Government will be able to collect more information from the companies and share it better.
Through tax evasion, individuals, companies, and organisations attempt to avoid paying taxes. Following the start of monetary markets, tax evasions in addition to other financial laundering activities have emerged as severe predicaments for macroeconomists. Although tax evasion in Egypt has always been a worry for economists, it has currently augmented to a greater degree given that the existence of new monetary markets favours tax evaders through the provision of simpler means of hiding their illegal money transactions (Feige 98).
The money that could otherwise have been utilised in economic and social advancement courses is used in criminal actions or in dangerous and poor ventures. Additionally, when the money from illegal ventures gets into the stock market, it creates unnecessary instability. In this regard, curbing tax evasion would allow huge chunks of money to be produced and utilised for welfare tailored ventures. This paper highlights an investigative report on tax evasion in Egypt with the interviewing of an economics university professor.
Evasion occurrence
Tax evasion is a progression that usually relates to the informal sector. A gauge of the degree of tax evasion is the quantity of the unreported revenue, which denotes the variation between the quantity of revenue that ought to be accounted in the tax systems and the real quantity reported.
An interview with the Professor of Economics in the American University in Cairo, Said Mona, revealed that the degree of evasion relies on some aspects by considering the financial equation coupled with the fact that attempts to evade tax decreases with the decrease in the money under transaction (Baldry 357). The professor as well stated that the degree of evading taxes relies on the effectiveness of the tax management. The increased level of corruption by tax officers in Egypt adds to the complexity of managing tax evasion.
Tax officials employ different ways to decrease evasion and augment the degree of imposition, for instance through privatisation. The evasion of tax is a criminal offense in Egypt and individuals who are found guilty are sentenced to fines or detention.
Deceitfully misreporting profits in a tax return in Egypt is deemed as a criminal activity and such actions are dealt with in the criminal courts. In Egypt, other tax wrongdoings that are considered criminal include intentional misrepresentation of records. Furthermore, civil tax misconducts could attract penalties. Presumably, the degree of evasion relies on the strictness of reprimand for evasion (Baldry 361).
The Egyptian Tax Authority (ETA) handed an evasion assertion to the Orascom Construction Industries (OCI). This tax amounted to almost 5 billion pounds associated with the sale of building materials by the company in 2007. The Chief Executive Officer (CEO) of OCI is Nassef Sawiris. Orascom Construction Industries is among the leading companies in Egypt and it hires 90,000 individuals.
The employees of this company originate from approximately 36 nations across the world. The Orascom Construction Industries Construction Group offers global engineering and building services mainly on infrastructure, manufacturing, as well as high-end trade ventures in different countries for both public and non-public clients (Baldry 368). The Orascom Construction Industries Construction Group takes a position amid the best international contractors.
Importance of taxes
In Egypt and in all other nations across the world, taxes are fundamental. With respect to the economy, taxes act as the basic source of finances for an extensive scope of social and economic plans. Taxes are thus necessary to fund public services and accomplish a country’s fundamental responsibilities.
In Egypt, taxes comprise close to 60 per cent of government income. Every government across the world requires money to carry out civil functions and control the undertakings of the state. These funds are usually accumulated from the residents of the country in the identity of tax (Jalili 167). Each country has its particular means of ensuring that taxes are collected from its populace. Ignorance concerning tax is capable of bringing about numerous crises.
The money collected as tax assists a country in safeguarding itself as it handles military expenditures. Moreover, taxes assist in the advancement of infrastructure and the condition of roads, hospitals, and the environment at large. Additionally, taxes aid in the development of the status of education for through taxes, governments can offer education to all citizens and assist in the raising of the living standards. Individuals and organisations pay their taxes in a bid to sustain an efficient government.
Taxes act as returns for the government to facilitate in funding socialised services like medical attention and security among others; therefore, when nobody is submitting taxes, the community could fall apart and the country deteriorate.
Therefore, it is significant for each individual to pay taxes without failure. The government in a country can enforce taxes in different types, for instance, via income taxes, and toll tax among others. Not every person in a nation is required to pay taxes. Payment of taxes is reliant on nation to nation; however, in the majority of instances the individuals that earn very low incomes are at times exempted from paying some taxes (Jalili 172).
Moreover, not everyone in a given country is expected to pay taxes in an equal measure. Normally, individuals that have high incomes are expected to pay a bigger proportion of tax as compared to individuals that have low incomes. The residents of a country are not supposed to complain on the load of tax payment, rather they ought to consider the utilities that they obtain out of payment of taxes. Some of the services that are offered by the government through the money from taxes encompass the following:
Infrastructural developments: The government of any country requires money for the construction of roads, airports, ports, and communication networks just to mention a few.
Pubic security: Funds obtained from taxes are utilised in the provision of fire fighting equipments as well as hiring of police (Jalili 182). Moreover, such funds assist in financing the sustenance of the military forces (comprising of the air force, army, and navy) as well as adequately providing them with ammunitions.
Common services: Maintaining cleanliness of the roads, treatments of water, provision of lighting in urban centres, waste disposal, and sustenance of game parks and many more
Health services: Nearly every government offers adequate and subsidised health services to all its populace, which could encompass immunisation and relief from tragedies. All these aspects are made possible by the taxes that a government collects from its citizens.
Others include the sustenance of historic sites like museums, government and disaster reliefs, financing elections, finance government ministries and equipping them (Jalili 191)
Why tax evasion is not good
Tax evasion underscores any form of unlawfully evading taxes that an individual is obliged to pay. Tax evasion is at times confused with tax avoidance, which means taking measures to decrease taxes that are in accordance with the law.
The elements of tax avoidance include tax deductions as well as different lawful tax excuses. Tax evasion can take place with every form of tax, but it is usually linked to income taxes in addition to sales taxes. For instance, in Egypt there exists a legal income tax, and every income (whether money or material commodities) has an enforced tax.
Following its strictest description, many Egyptians probably engage in tax evasion by not including minor sources of income or the profits garnered, albeit in most cases such an occurrence happens unknowingly (Lachapelle 38). With the reality that it is nearly improbable to notice every one of the insignificant sum of money that change owners, the Egyptian government hardly ever hunts such insignificant cases of tax evasion for it concentrates on wider targets such as companies and rich people.
The interview with Said Mona as well gave the insight that taxes are normally regarded as economically ineffective tools, which underscores the suggestion that tax evasion could potentially have positive outcomes on the economy.
The theory behind this suggestion hinges on the assumption that taxes act by augmenting the costs of commodities and thus general expenditure diminishes with the augment in taxes, and consequently economic action drops. The suggestion for taxes is that communities and companies are not capable of accurately assigning resources toward ventures that are meant for the universal good, for instance roads, airports, and other forms of infrastructure.
Hence, the government is given the responsibility of collecting taxes in a bid to try and perfectly allocate this money for the provision of public amenities (Lachapelle 40). The fundamental economic laws could imply that in the nonexistence of the government, non-public organisations could fill the gap in offering pubic amenities and carry it out more effectively since there could not exist such barriers as tax collection, tax evasion, and government establishments.
However, as Said Mona made it clear, non-public organisation can never be more effective in carrying out all the responsibilities when judged against the government. Even though the notion of taxes being economically ineffective provides support to the likelihood of tax evasion being an economically effective exercise, tax evasion as well brings about numerous detrimental results.
To start with, the government has to use resources in a bid to recover the taxes it is owed, which could appear as a wasteful exercise to the community. In a case where no individual evades taxes, much money would be channelled towards beneficial schemes rather than being utilised in the recovering of evaded taxes.
In addition, an effective capitalist economy depends on rivalry amongst businesses (Lachapelle 41). Nevertheless, when one business is practicing tax evasion and the other one is not, it generates a simulated benefit for the business engaging in tax evasion. This process could allow businesses with diminished dealings to survive longer than the ones that have effective processes, which could be harmful to the economy.
Egyptian Government not doing enough to tackle the problem
Even if the Egyptian government is carrying out more strenuous attempt to restructure the nation’s tax authorities (particularly with respect to making it more investor-pleasant), it still holds the characteristic disorder and ineffectiveness prevailing all through generations of social ineffectiveness.
Tax evasion is not a big issue in Egypt owing to the intricate and highly inefficient collection scheme. Managers have established several tactics for saving their foreign employees from the misery of striding through tax laws. In this regard, most of these employees are paid in the form of cashable cheques or hired as fake consultants, which is meant to leave the choice of payment of taxes to the workers themselves (Resnik 44).
When workers are paid through cashable cheques or as consultants, they are aware that the possibilities of the Egyptian government ever claiming taxes from them are insignificant. Nevertheless, for those receiving huge sums of money, they are easily likely to be discovered and thus are compelled to pay their taxes. Therefore, the tax reforms made in Egypt by the close of 2005 were essential to decrease tax hindrances to investments. Nevertheless, the reforms are still not adequate to tackle the problem of tax evasion effectively.
Summary
Through tax evasion, individuals, companies, and organisations make endeavours to avoid paying taxes. Additionally, through tax evasion, the money that could otherwise have been spent for economic and social progress is used in wrong actions or in hazardous and poor ventures.
While interviewing Professor Said Mona, it was disclosed that the degree of evasion relies on some characteristics by taking into contemplation the financial equation and the fact that the endeavours to evade tax diminishes with the lessening of the amount of money one is obliged to pay. The evasion of tax is an unlawful offense in Egypt and the persons who are found blameworthy are sentenced to fines or detention.
The Egyptian Tax Authority (ETA) has accused Orascom Construction Industries (OCI) of tax evasion amounting to almost 5 billion pounds. Taxes are essential as they fund public services coupled with facilitating a country’s fundamental errands. Tax evasion is capable of bringing about numerous crises. The money amassed as tax is used to assist a country in safeguarding itself as it holds military expenditures.
Taxes are used to support the advancement of infrastructure and the environment at large. Moreover, taxes serve in the development of the status of education. Even if the government of Egypt is implementing strenuous endeavours to reorganise the nation’s tax authorities (mostly with regard to turning it into investor satisfying), it still embraces the typical disorder and futility prevailing all through cohorts of social ineffectiveness.
Conclusion
Although tax evasion has always been an alarm for economists, it has presently augmented to a larger degree given that the majority of the new monetary markets favour tax evaders through the provision of simpler approaches of hiding illegal money. An interview with the Professor of Economics revealed that the measure of tax evasion relies on some facets, by taking into deliberation the financial equation and the fact that endeavours to evade tax lessen with the reduction in the money that one is required to pay.
Evasion of tax is capable of causing plentiful of crises. Taxes support great developments carried out by the government at the advantage of its citizens. Tax reforms in Egypt in 2005 were essential to cut tax hindrances to investments. Nonetheless, the reforms are still not satisfactory to tackle the difficulty of tax evasion successfully. Therefore, the Egyptian government should put in place other strict measures to counter tax evasion.
Works Cited
Baldry, Jonathan. “Income tax evasion and the tax schedule: Some experimental results.” Public Finance 42.3 (2011): 357-383. Print.
Feige, Edgar. The underground economies: Tax evasion and information distortion, Cambridge: Cambridge University Press, 2007. Print.
Jalili, Ali. “The Ethics of Tax Evasion: An Islamic Perspective.” The Ethics of Tax Evasion 1.1 (2012): 167-199. Print.
Lachapelle, Jean. “Lessons from Egypt’s Tax Collectors.” Middle East Report 264 (2012): 38-41. Print.
Resnik, David. “Practical and political problems with a global research tax.” The American Journal of Bioethics 10.6 (2010): 44-45. Print.
The U.S. government is very clear on the affirmative final determination on antidumping duty order on steel wire garment hangers from Vietnam. Although the legislation became effective on February 5, 2013, the act was published on December 26, 2012. The products affected include steel wire garment hangers that are fabricated, galvanized, painted, coated with epoxy or latex, and those fashioned with paper covers among others.
This action was taken because the government of Vietnam had highly subsidized the manufacturing process of hangers thereby making the hangers from Vietnam cheap and affordable as compared to the products manufactured from the local market in U.S. The U.S. government felt that Vietnam was dumping her hangers in the U.S. market.
Effects of the Duty
Six months before the publication of the affirmative final determination, the government had imposed temporary duties on the affected products (CNN 1). The publication of the act means that the duties of one hundred and eighty-seven percent imposed on the products are permanent from the effective date i.e. February 5, 2013.
It is clear that Vietnam is the top exporter of wire hangers. However, the antidumping duties did not affect the wooden hangers that are manufactured by Vietnam in large amounts (CNN 1). The effects of the duty have already been felt in the U.S. and other parts of the world.
To begin with, the duty imposed on the hangers forced the wholesale prices of the hangers to rise. Dry cleaning companies experienced a ten to fifteen percent increase in the price of the affected goods. For instance, initially, forty dollars would help a businessperson acquire five hundred hangers.
However, that has changed since the same amount of money gives the businessperson half the amount of goods. The drycleaners effectively passed over the same to the consumers thereby increasing the overall charge on consumers by an average margin of two percent. This has seen customers reduce the amount they spent on dry cleaning. The companies currently receive half the total revenue they used to receive due to reduced quantity of work.
The sharp increase in prices has forced some dry cleaning companies to close down. This could also be attributed to the fact that some manufacturing companies have diverted their businesses to other business lines (O’Brien 57). This hurts the U.S. economy since job opportunities are lost as they are created in other markets such as Cambodia.
The people who were working in the firms have to look for work elsewhere. In the process, the government was losing revenue through taxes. High prices have ultimately reduced profits made by dry cleaning firms to a level of making just enough money to pay the recurrent bills and rent.
When people get more income, they are likely to spend more through their disposable income or the amount kept aside for investment. The government encourages investments from the private sector.
For instance, when an entrepreneur quits a government job to begin private business, the merits accrued from such an action are not enjoyed when they close down following high prices arising from government tax. The impact of the duties is clearly indicated when beneficial projects are no longer beneficial. Some dry cleaning shops have closed down yet the remaining ones do not feel the positive impact.
Conclusion
The analysis of this duty shows that the only winners are the foreign governments such as Cambodia who have benefited when other manufacturing companies relocated. Other countries other than the U.S. received new investors hence began to enjoy the advantages that accompanied the U.S. affirmative final determination. The other groups are all losers including the governments U.S., and Vietnam, the dry cleaning companies, the entrepreneurs, and the employees.
Works Cited
CNN, Money. Trade penalties squeeze US dry cleaners, New York: CNN Money journal, 2012. Print.
O’Brien, Hubbart, Macroeconomics, New York: Pearson Publishers, 2012. Print.
Introduction: Put on the blue hat and answer the following
What is the proposal?
The proposal is for the UAE residents to start paying income taxes in order to help the government to finance more projects in the sectors such as education, health, and provision of other public goods.
What is the current situation regarding this policy?
At present, the UAE residents are not paying taxes on their income. The proposal has been made and currently being debated by the Federal National Council (FNC). The proposed policy might be good in the long run since the government will be able to finance more public goods that are beneficial to the residents of the UAE.
Analysis
Recommendations
It is important to win the general public before implementing the proposed policy change. This will cushion the government from any negative fallout with the residents of the UAE who currently hold a negative opinion about the proposal. Besides, the government will avoid the dangers and risks of a potential public unrest. In order to guarantee acceptance of the proposal, the government of the UAE, through the supreme leader and the FNC, should roll out civic education to promote the benefits of the proposal such as better healthcare services, improved education standards, and improved income for provision of public goods (Baldwin, 2011). The government might also consider increasing the current rental levies that will have same effects as introducing the income taxes.
The global financial predicament affected several governments to search for new approaches of getting revenues. A prosperous nation such as Australia established a Resource Rent Tax in order to replace the Royalty Based Program. It was perceived as a prefect strategy which would enhance effectiveness of Resource Taxation.
The Mineral Resource Rent Tax was an important policy that would enable a fair redistribution of prosperity acquired from mining industry to all Australian citizens.
Nevertheless, political revolution happened due to the fact that the Australian government proclaimed the tax policy as an absolute system rather than negotiating and engaging with investors in order to build a convincing coalition to enable reformation through the resource taxation process.
This caused a media protest against the tax initiative by mining firms that triggered political strife, including the dismissal of former Australian Prime Minister Kelvin Rudd, who was democratically elected.
After removal of the former prime minster, important compromise was conferred between the newly appointed Prime Minister Gillard Julia, and the big mining firms that introduced Mineral Resources Rent Tax (MRRT) as a policy that replaced Resource Supper Profit Tax (RSPT). It was perceived that the Resource Supper Profit Tax (RSPT) was oppressing both local and foreign investors because of high taxation rate imposed on them.
The challenges encountered by Australian government in implementing vital taxation policy emphasize the significant roles which stakeholders could perform for policy making in a democratic society. This paper would analyze impacts of MRRT policy on operation of mining firms; it also evaluate effects prior to and after establishment of the MRRT plan on Austrian economy.
Mineral Resource Rent Tax Policy (MRRT)
“On 2011 10th June, the Australian government established the Mineral Resource Rent Tax (MRRT) policy into the parliament” (Daniel, Keen & Mcpherson, 2010, p.33). The MRRT policy would be applicable to both existing and upcoming coal and Ore firms in Australia; it would be charged at thirty percent rate of taxable gain acquired by mining firms starting from July 1st 2012.
The policy was proposed following a conference with the resource sectors; the government selected Policy Transition Group (PTG) headed by the Minister of Resource Management to confer with the stakeholders of the mining industry.
Fardin claimed that this convention was meant to generate appropriate recommendations to the federal government concerning advancement of technical system of the newly proposed MRRT (2011, p.67).The Australian government would focus on how to generate $ 10.6 billion from the Mineral Resource Rent Tax policy in the first initial three years in operation.
According to Golob, the MRRT policy was expected to expand the coverage of the present Petroleum Resource Rent Tax (PRRT); in such a way that as from 2012 1st July the proposed tax policy would be applicable to both Offshore and Onshore gas and oil generation systems in the country (1995, p. 78).
“The Mineral Resource Rent Tax (MRRT) would eventually be passed into regulation only on certain mining firms, though not on equal basis because some mining companies would be exempted form the taxation policy” (Johnston, 2005, p. 89).
Resource Supper Profit Tax (RSPT)
Herring affirmed that the Australian government imposed extra charges on the utility of non-renewable resources (2010, p. 69).The mining companies in Australia had to contribute royalties to former existing government. As a matter of fact, “most royalties depend on value of production output of the mining company at the time of balancing” (Luong & Weinthal, 2010, pp. 20-22).
Natural resources were considered as an essential factor of production just like capital and labor. The Australian government imposed levy duties upon non-renewable resources due to many justifications. For example, non renewable resources were depleting when used, hence tax collected by the government would be used in other essential investment programs in the nation.
Walter perceived that Resources Super Profit Tax (RSPT) was established to substitute the collection of royalties which mining firms paid to the Australian government (2011, pp. 10-11).
“The RSPT strategy was expected to tax any gain (profit) made from mining firms which was above six percent of Capital Investment that was subjected to be taxable at forty percent rate” (Otto, 1995, p. 43). Mining firms contributed royalties to the government differently depending on minerals mined.
Graetz & Warren claimed that the RSPT expected the mining firms to pay forty percent of their output gain as royalties to the federal government (2006, p.4). However, mining investors rejected RSPT due to its high taxation charges; this led to establishment of MRRT that recommended a reduced tax amount of thirty percent tax of the profit gained by the mining company.
“There was a strong contention that Australian citizens deserved to obtain a fair share of national profit reaped from non renewable resources” (Barde, 1999, p. 2). This was actually the reason why the MRRT policy was formed.
Although, Australian citizens benefited from mining boom, certain industries performed poorly; this was because of high demand of Australian resources eventually raised cost of Australian products to be higher (Auty, 2001, pp.67-72). This negatively affected manufacturers and farmers who exported goods and services from the country. This made exported products to be expensive to foreign customers.
Mining companies performed well in the market but exporters were doomed financially. This called for a new mining taxation policy that would reduce company tax from forty percent to thirty percent rate tax. This led to introduction of MRRT that substituted RSPT.
The MRRT policy exempted other business companies from paying tax. Brawley & Dixon asserted that MRRT policy was intended to resolve the imbalance economy of Australia that would ensure that the mining boom industry would benefit every Australian citizen (2009, p. 53).
Economic reforms ensured that mining taxation would be enable average employees to obtain an estimate of $ 450 each year due to reduced mining tax program; this would also exempt some companies from paying tax (Montrie, 2003, p.45).
It was expected that food cost would reduced by 0.7 %, footwear and clothing prices would decrease by 1.2%, communication cost would reduce by 1.5%, transportation and housing cost would decrease by 0.8 and 1.0 % respectively. Besides that, inflation rate would reduce by 1.2 that in turn would increase clients’ interest rate that eventually would increase Australian GDP by 0.8%.
The anticipated Mineral Resources Tax program was focused to fund a minimization of the business tax rate; to enhance infrastructural investment policies and to promote superannuation contribution (Herring, 2010, p.30).
The RSPT debate captured much attention from the public that caused the downfall of Rudd Kelvin, the former Australian prime minister. Resource super profit tax (RSPT) was actually complicated; many naughty comments were made about the taxation policy.
In Australia, “there was global appetite to sustain business enterprises that could continue for long term basis; this caused much demand from international economies” (Lamb, 2002, pp. 189-191).The Australian government fortunately recognized mining industry as a sector that would contribute a fair share for the huge gains it would be making in trade.
Freedam viewed that the RSPT entailed that the taxation policy for the resources mined were taxed according to royalties levied upon revenue percentage collected from the mining companies (2006, p. 12). The royalties were charged by the Australian government to grasp and redistribute the profits from mining industry and sales of resource products which belonged to every Australian citizen.
However, “being that 40% of BHP’s investors were non-Australian individuals; showed that Australian citizens would not necessarily benefit from all gains generated from the mining industry” (Otto, 2006, p. 203). This also meant that small firms might pay more royalties comparing their taxation contribution to huge companies that benefited from the economies of scale.
The reality was that RSPT policy was complicated than what stakeholders thought of; the policy was drafted with common misconception. Furthermore, the existing companies expected the RSPT policy to be applicable to new upcoming firms only. This was because the existing mining companies claimed that tax retrospective function did not favor them thus they wished that taxation charges to be shifted to new companies.
According to Suter, “there was a contentious debate concerning government’s utility of Long Term Bond Rate of 6% as unsuitable recommendation to measure government gain toward 40% share of company cost” (2006, p.3). Mining industry wished that RSPT policy to be applicable to resources or products but not upon mining projects; claiming that there were great variation between Coal Ore projects and natural resources.
This meant that the government failed to consult various stakeholders when designing the RSPT tax policy. Such inappropriate policy portrayed how the Australian government risked affecting its economy. It could be concluded that RSPT policy on mining industry upon Australian economy was in vain.
Through the Australian government concession, the RSPT policy was abolished, and therefore was replaced by MRRT guiding principles. Whereas the RSPT focused on two thousand and five hundred firms, the MRRT policy would only involve 320 firms on taxation program.
This showed that the MRRT policy would exempt some companies from paying tax. The MRRT policy would be applicable to Coal and Iron Ore mining firm on taxable program, however, the taxation policy would be not be imposed on Nickel, Copper, Uranium and Nickel mining firms. While the RSPT tax rate was 40%, the MRRT tax rate would be reduced to 30%.
Emerson & Lloyd stated that the MRRT policy would have 25% mining allowance that would be subtracted from the tax liability, thus making a fresh rate of MRRT to be 22.5%”(1981, p.104). The MRRT policy would take its course as from 2012 1st July. Many investors welcomed the MRRT strategy because miners conferred a reformation to the retrospective entity of RSPT.
Barde opened that mining investors still expected to reduce the liability of MRRT plan through valuing their firms either on recent market price or historical cost basis (1999, p. 2). In case, the historical cost adopted, mining investors would increase their market values from 12% to 13% prior to calculation of tax liability.
On the other hand, when the recent market prices adopted, there would be no increase in investors’ gains. All these strategies were analyzed to enable investors to look forward on how to minimize MRRT tax liabilities.
Benefits of MRRT
The mining boom was a grand boost to the Australian economy because it would generate new investments and open job opportunities. It was important to recall that mining activity was an occupation that was quite different from other industries. Iron and coal ore were natural resources that should be fairly owned by all Australian citizens; once they are sold, they can never be renewed.
The aim of this policy was to examine effective approach to support future exploitation and to ascertain a stream of fresh resource firms for future production. Mining sector held a constructive conference that concluded to abolish the contentious Resource Supper Profits Tax (RSPT) policy in order to replace it with MRRT (Mineral Resources Rent Tax).
“Rudd Kevin, the former Prime Minster of Australia had declared that his government was intending to established RSPT 40% mining gains (taxable amount) from mining industries” (Daniel, Keen & Mcpherson, 2010, p. 34). Such a move, however, provoked heated response from miners that led to deferment or cancellation of some strategized business investments.
One of the concerned issues was the high amount of RSPT tax and its severe implications to the preset firms. Nevertheless, the current Prime Minster, Gillard Julia, responded faster in order to prevent angry strife between petroleum industries with the government in the national history. According to MRRT policy, the tax rate was reduced to thirty percent; charged on taxable gain from mining companies.
The proposed tax would be operational commencing on 2012 1st July, which would be applicable for only Coal and Iron Ore resources; in fact other mineral companies were not included in this policy. Actually, the mining sector was impressed toward Gillard’s policy.
The mining industry was motivated by the existing government’s strategy. Fardin perceived that the mining firms accepted the fresh policy that would represent an important development to the mineral taxation programs which would suit mining industry’s chief regulating standards (2011, p. 70).
Gillard, the Australian Prime Minister, opened that the new resource tax negotiation was aimed to restore government intention to provide effective services to all Australian citizens since national’s natural resources were owned by all national citizens; when exploited could never be once renewed.
The MRRT was a tax policy that would be competitive, prospective resource based and differentiated strategy which would ascertain mining industry to develop through investment in the business projects; therefore the policy would benefit all citizens.
“The MRRT policy was affirmed regulations of sound tax reforms” (Huang & Austin, 2011, p. 191). Mining industry was expected to continue to collaborate with the government in order to ascertain that the formulated policy of Mineral Taxation would sustain the global competitiveness of Australian resource sector into the future prospective.
Natural resources such as Silver, Uranium, Copper and Gold were not included in the MRRT policy; these were business gains for hugest hole on earth ever dug on the surface of the world. “This meant that the Olympic Mine Dam (a mining firm) would not be included in the MRRT policy” (Golob, 1995, p.78).
The MRRT policy was the initial stage toward a more effective taxation to the profits reaped from the mining boom; in fact, not a single penny that was reaped for MRRT plan would be obtained from Olympic Mine Dam.
Olympic Mine Dam was one of the Australian hugest mines that were expected to generated billion of money in business operation of Silver, Gold, Uranium and Copper; however none of such resources would be included in the Mineral Resource Rent Tax Policy.
Johnston viewed that, though many mining firms were impressed with the MRRT policy, people who would lose life-time opportunity were the coming future generation because their natural resources are being given away in a meager amount (2005, p. 89).
The mineral resources were being exploited leaving the future generation with nothing but massive toxic heritage of their world largest radioactive waste deposits.
Nevertheless, many mining companies in Australia endorsed MRRT strategy because of its effectiveness; the MRRT regime still needed to be amended in order to reap a fair profit from national shared mineral resources to empower the return of projects which would benefit every Australian citizen, for instance the need to strengthen public education of the nation.
Australian government scrapped the Resource Supper Profit Tax (RSPT) and formulated a fresh tax policy upon Iron and Coal Ore industries that was called Mineral Resources Rent Tax (MRRT). The MRRT policy would minimize the amount of taxpayers from more than two thousand companies to 320 firms.
Lamb stated that the new plan also proposed to expand the already existing Petroleum Resources Rent Tax (PRRT) which would cover the Onshore Gas and Oil firms, as well as the North West Shelf and Seam Coal Gas (2002, p.56). The MRRT policy proposed a low tax rate of 22.5%; a further reduction from headline rate of 30% that was previously from 40% of RSPT rate.
The MRRT strategy proposed a twenty five percent mining allowance that meant to reduce MRRT gross liability to every affected firm. The proposed MRRT represented essential principles; however, it would need widespread analysis and design prior to implementation. The affected mining firms were expected to deliver input to the strategized transition process.
The newly proposed MRRT was designed to minimized tax burden from investors. The Gillard government intended to scrape the former declared resource discovery rebate (RSPT); it also focused to abolish State royalties and incurred losses refundability.
Montrie affirmed that the expansion strategy of PRRT and planned MRRT was expected to enhance competiveness of Australian economy and to motivate Australian resource mining firms (2003, p. 45). Nevertheless, the proposed MRRT needed a detailed evaluation by resource mining firms and investors in the country, and to analyze its global impacts on upcoming investment proposals.
It was good that big mining firms and the Gillard government agreed to introduce the MRRT course of action. “The uplift rate of unsubstrated expenditure was based on Long Term Bond Rate (LTBR) together with 7 % loading per year” (Suter, 2009, p.4). Nevertheless, the MRRT plan would still be derived from project gains prior to interest expense.
Therefore the debt funded investors would have to put into consideration the financial debt implications of affected companies. However, “the Gillard government abolished the refund proposal concerning termination of loss incurring firms; this might affect small investors and firms operating on single projects” (Walter, 2011, p. 16).
Implications of MRRT
The MRRT strategy was a profit oriented focus which would provide an objective share of profits from trade practice of non-renewable resources to every Australian citizen. Gillard Julia, the Australian Prime Minster, conferred the deal with big mining firms to strengthen the national resources and promotion of regional mining societies not only now but also in the future.
“The MRRT plan was an essential policy that would ensure that citizens prosper from the national minerals” (Auty, 2001, p.71). In the previous decade, the cost of Coal and Iron Ore has increased on global markets. For instance, since the year 2003, the contract cost of Iron Ore has risen more than 500%.
Nevertheless, the Australian government has not gotten a fair share of the bonus profits reaped from royalty expenses. In the previous decade, the share of mining revenues has doubled. The nation used to get $1 for each $ 3 income during the last decade; but currently Australia gets $ 1 for every $ 7earnings.
The mining revenues increased in 2008-09 by $ 80 billion than the previous decade; however the Australian government only accumulated an extra of $ 9 billion in profit.
Walter opened that natural resources in Australian nation were owned by all citizens, and therefore all citizens were justified to receive a fair share of the national wealth (2011, p.16). This was the fundamental nature and drive of MRRT plan; it was a mechanism that was focused to receive a fairer cost on national resources which could only be sold once thus can never be renewed.
Brawley & Dixon claimed that the Gillard government was focused to raise $ 10.5 billion using the Mineral Resource Rent Tax (MRRT) approach for the initial two years in operation (2009, p. 58). The revenues accumulated would be utilized to finance a tax reduction for Australian business functions and to enhance living standards of hard working families.
The profit collected would be used to develop local communities through building various communal infrastructures. Indeed, all Australian employees deserved to receive a suitable and secured financial retirement. Under the operation of MRRT, the superannuation for workers would increase from wages of 9% to 12% minimum rate.
The low class families would get a maximum of $ 500 in a year through a fresh government rebate that concerned super contributions. Recently, women have doubled their super savings than their male counterparts. This meant that a woman would receive an extra $ 78,000 for retirement as a service of caring her family during off work.
Graetz & Warren perceived that superannuation contributions would obtain tax concession from the Gillard administration (2006, p.4). Most Australian citizens would, therefore, pay a reduced amount on super contribution than what they pay for their wages.
The MRRT policy would enable the Gillard government to provide for the concession on the extra superannuation input; it would cost $ 2.4 billion to be funded by the federal government. Besides that, the tax packages would enable employers to fund additional super contribution by reduction of their firm tax.
“The Mineral Resource Rent Tax would reduce firm tax to twenty nine percent and even much further; actually, small business would be given the first priority to get the tax reduction in 2012-13” (Luong & Weinthal, 2010, p. 24). Small business would also be advantageous to receive the direct Write off Assets to a maximum rate of $ 5,000. The Mineral Resource Rent Tax would boost development in local communities.
The MRRT would provide 4.6 billion for local infrastructural fund which would be invested in developing projects on the regional mining societies. This was to make certain that local Australian families obtain vital societal infrastructures to enhance vibrant urban places for younger generation to live in.
Contentious Issues on MTTR
“The policy Of Mineral and Resource Rent Tax was undergoing hot debate particularly for local investors who affirmed that the tax policy discriminated against them” (Otto, 2006, p.205). Currently, the domestic firms were organizing to create a constitutional challenge against the accepted newly proposed MTTR plan.
Local mining companies claimed that the tax base would be unjustifiably narrow that aimed to seek revenues from three hundred and twenty taxpayers on only two natural resources: Iron and Coal ores.
“Domestic firms perceived that the MRRT policy would be a volatile tax strategy that would be faced with big fluctuation influenced by pricing of international commodities; it would be inappropriate to fund on the continuing budget operations” (Freedam, 2006, p.12).
It emerged that the endorsed MRRT policy was derived out of a private consultation between the leading mining companies (Xstrata, BHP Billiton and Rio Tinto) and Australian government.
The strategy was then recommended by the Government Advisory Committee called Policy Transition Group (PTG) that discharged ninety four recommendations of the proposed MRRT plan.
According to the current stipulation, the MRRT policy would not be imposed upon Copper, Uranium, Nickel and Gold yields; this implied that international mining companies such as AngloGold, Newmont and Newcrest would be exempted from MRRT taxation policy. Rio Tinto and BHP have monopolized Uranium market while the Olympic Mine Dam was the leading company on Copper mines.
However, some investors perceived that Mineral Resources Rent Tax (MRRT) was crucial on the Australian economic reforms which would enable the country reap the profits of mining boom; MRRT policy was a genuine labor reform since it would ascertain that all Australian citizens would share profits of the mining boom, in fact it was not for few individuals.
Emerson & Lloyd 1981 viewed that the MRRT policy was greatly needed since everybody was aware that the mining boom would not last forever; the resources were naturally made and could be mined and sold once (1981, p.105). Such resources were owned by every Australian citizen, and actually not by mining firms. It was therefore seen that every citizens should benefits from the resources.
The only excellent profitable mining firms would participate in the MRRT policy, therefore the contributed amount would be meant to build the national economy, job creation, national saving and infrastructural developments. “The Gillard government would increase superannuation fund to 8.4 million employees that would enhance national savings in the year 2035 by $ 500 billion” (Otto, 1995, p.205).
Crucial investment on infrastructural development on bridge and road etc would be promoted by mining industry. The Gillard government would be in a position to provide superannuation input for 3.6 million low earners, this would be meant for individuals who earn low than $ 37,000.
The Ministry of Labor worked hard to ensure that the economy of Australia remained strong by motivating working people, hence spreading the profits of the mining boom in the development programs of the economy. The big mining firms permitted that the Mineral Resources Rent Tax policy would yield $ 10.5 billion to the national communities.
However, “there was a controversial issue surrounding MRRT; some investors opposed the recommendation of MRRT, and thus wished MRRT to be abolished” (Daniel, Keen & Mcpherson, 2010, p. 35).
Some investors claimed that, in case the MRRT policy was scrapped, the Liberal Party would decline three percent increase in the Super Saving scheme; hence this would hinder working citizens and their families to retire with monetary security. This showed that the Liberal Party would terminate the fresh government refund on super contribution for low class people; the Liberal Party would not be in a position to reduce Company Tax.
Finally, Liberal Party would also terminate $ 6 billion to be invested in regional societies through local infrastructural fund. However, other people perceive to challenge the Gillard government over the MRRT policy, claiming that the policy was poorly designed policy.
According to Graetz & Warren, the MRRT policy would create unfair advantage through reduction of overall cost hence giving a fair advantage to the big mining companies; this would be unfair to small mining firms (2006, p.4).This policy would limit investment of the nation whereby investors of Coal and Iron projects would encourage investment projects in other nations away from Australia.
Some investors felt that mining was the main backbone economy of Australia; thus the MRRT policy would hurt the national economy. Johnston opened that supposing the MRRT policy would not be abolished, there have to be tax equality that would be liable to all firms (2005, p.89). Legislative reformation must be established to ascertain that small miners contributed equal tax rate paid by big miners.
Actually, fairness and objective principles should be attained on equitable base in the mining sector where all investors have equal playing levels. Some economic analysts expected the Gillard government to scrape the financial and assumption modeling that was used to approximate anticipated revenue of MRRT policy.
Montrie asserted that research showed that there would be no substantial contribution toward MRRT policy since leading mining companies such as Rio Tinto and BHP Billiton would not be contributing tax amount toward MRRT policy (2003, p. 45). It would be impossible for Gillard government to raise the expected $ 11 billion from mining Coal and Iron Ore projects.
In fact, the proposed revenues would not be achieved because the leading three Iron Ore mining companies were exempted for paying tax by MRRT policy.
The Gillard government was aware that the financial model of MRRT policy would not be possible yet it persisted to claim that big mining companies would contribute ninety percent of the tax contribution; this would be impossible. The MRRT policy does not make sense because it would not work.
Conclusion
The Mineral Resource Rent Tax (MRRT) would fail because the Australian government have not negotiated and communicated with all stakeholders upon the proposed tax policy. An effective method could have been adopted to utilize a strategic communication in order to develop coalition of all stakeholders to embrace reform process through the MRRT policy.
Negotiation process would enable important recommendations to be included in the tax reform. The strategy development process should be comprehensive in order to sustain dialogue between the private sectors and Australian government, and to attend stakeholder workshops involving all participants.
Nevertheless, the Australian government should strategically negotiate with all stakeholders, especially mining firms in order to generate a coalition policy which would be important to establish reforms to the Mineral Resource Rent Tax (MRRT) plan.
Reference List
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The ongoing political and economic changes in the modern world cause the need to reform the government structure or business within the countries. The fall of 2015 can be characterized by the price decrease in oil production. The side effect can be rather dramatic for numerous countries that are dependent on this resource, and that is, the needed decisions should be made and actions taken to eliminate the negative impact of the significant changes in oil price.
The United Arab Emirates (UAE) experienced the important economic improvement due to the discovering of the oil resources. The raw material supported the progress in the sphere of living standards and industry development.
However, because of the climate peculiarities, the UAE consumes a lot of energy (air conditioning, water producing). The UAE took the dominant position on the global energy market as according to the OPEC reports, the country increased the oil production while other countries experienced the decline in oil extraction. The impressive economy of the UAE seeks the ways to influence the economic environment of the country.
The discovering of the oil sources transformed the UAE to the economically powerful country; however, the other side of the problem is that oil and gas made the UAE dependent from the sources and can be used by other countries, as the major government revenue is the export of oil. The government of the UAE took certain decisions and actions to eliminate the dependence and reduced it from almost 85% in 1980 to less than 55% in 2005 (Fernandes & Karnik, 2009, p. 138).
The decline in the dependence made it possible to improve the other sectors of the economy in the UAE. The following spheres received the priority, namely tourism, economy, IT technologies, and transportation. The primary purpose of the paper is to highlight the issue with the value-added-tax (VAT) in the UAE, stress the strength and weaknesses of such system, and to discover the alternatives of the VAT that can be implemented in the UAE.
VAT in UAE
VAT is a widespread phenomenon in the modern world. It should be stressed that every economic reform should be carefully examined and analyzed before the implementation as the consequences of the economic changes affect every resident (Ahmad, 2010, p. 229). It should be stressed that the tax-free economy in the UAE is one of the major attractive aspects for the tourists. According to the widespread opinion of the finance experts, the VAT implementation in the UAE possibly can lead to the fact that tourists will spend less while being on vacation. It can have a negative impact on the UAE economy. The government should develop different projects that will allow non-oil sectors to develop.
Possible Effect of the VAT System in the UAE
VAT is rather widespread in the modern world as it can be considered as the powerful economic tool for controlling the economic variables. However, it should be stated that not every developed country implements such tax system. The United Sates and the UAE are the countries where VAT is not used. The unstable condition of the oil market demands urgent solutions. The major export material in the UAE is oil and the decrease in the price of the raw material consequently affects the political and economic strategy of the country.
Although, there is no common idea whether the government of the UAE will keep to the VAT or not, it should be highlighted that the number of business try to adjust to any reforms made in the sphere of tax service as the tense situation on the oil market can be the reason for certain significant economic changes. The consequences of the VAT system implementation will influence the business, and that is, possible difficulties should be taken into account. First and foremost, it should be stressed that changes will have a significant impact on the functioning and the price aspect. The companies will need to reform and review their financial structures.
According to the experts in the field of finance, the Vat system implementation will affect the number of business, namely the sphere of the IT technologies, finance, and strategy (Fernandes & Karnik, 2009, p. 138). The introduction of the VAT system is believed to balance the budget and avoid the severe consequences of the unstable oil market. Although the VAT seems to be a perfect economic solution for the UAE, the new tax is likely to awake the negative reaction from the side of consumers in countries with the higher level of unemployment. According to the experts in the field of finance “the introduction of a low level of VAT in the UAE may create only minor dissent, but in Saudi Arabia (where there is 12 per cent unemployment among locals) the introduction of VAT might cause significant public dissent” (Alshaali, 2015, para. 6).
As the decision regarding the implementation of the new tax system is not taken yet, companies and businesses should not make dramatic changes in their operation and finance structure; however, there should be no doubt that certain measures should be taken to provide better adjustment to the VAT in future. Nilesh Ashar, the member of the KPMG, stated:
Some of these include modeling the fiscal impact of taxes in business plans by making reasonable assumptions, reviewing intercompany arrangements to determine the basis of cross – charges ( or lack thereof), reviewing contracts to assess current position of tax clauses, analyzing financial systems to assess overall readiness, and also reviewing the potential impact of taxes on supply chain and operating structures (Rahman, 2015, para. 7).
The government encourages the companies to stay updated in the sphere of taxes and the effect that VAT may cause for the business plan.
The Strength and Weaknesses of the VAT System in the UAE
The Ministry of Finance in the UAE made an announcement that the reform of the finance structure will be changed and that caused a lot of debates among the specialists. The consumption-driven economy of the UAE has certain peculiarities and should be reflected in the tax system (Alshaali, 2015, para. 2). The deadweight loss is a term in the economics that is used to describe the reduction in the economic index consequently leads to the new tax system or the incensement of the ones that are already used. The deadweight loss is believed to have a greater effect on the consumers.
The implementation of the VAT has certain economic advantages. First of all, it should be stressed that the system has economic benefits to the companies that sell products as they should pay the government the full amount of the sales tax, whereas the company producer is not obliged to do it. The introducing of the VAT will make all the parties to pay the tax equally. The consumers will be also affected; however, the less people buy, the less taxes are paid. The VAT system was successfully implemented in the countries of the European Union and was beneficial for the uniting of the countries.
Although the stated above benefits of the VAT system show that the new tax system can be viewed as the successful one, experts should pay close attention towards the evident disadvantages of the system. The tax is believed to be a regressive one and affects people with the lower income more. If a person with an impressive budget possibilities spends only 15% of the total income, it means that this percentage will be taxed, whereas people who spend 90% of their income will be taxed on 90%. The other issue with the VAT is that the government should spend a big amount of money to be sure that everyone is paying VAT. That is, the system brings not as much economic profit as expected. The companies who omit to pay VAT lay the responsibility for the taxes on those who pay.
Sanyalaksna Manibandhu is sure that the government should be selective while taking the decision regarding the VAT. The primary disadvantage is that the tax will affect consumers with the lower income and that is, according to the point of view of Sanyalaksna Manibandhu, not all the groups of goods should be taxed. Food should not be the category under the taxation; however, the cigarettes should as the law should not affect poor people. The taxes should be raised from those people who can afford to buy expensive goods (Rahman, 2015, para. 4). With the fiscal deficit because the decrease in oil price the UAE should take the needed measures to eliminate the negative consequences of the tense in the oil market. The country increased the price on the petrol.
To get deeper involved in the issue and to analyze the effects of the VAT it is to examine how the reform in the sphere of taxes will affect consumers. The impact of VAT will vary between the incomes of the customers and their spending behavior (Maceda, 2015, para. 6).
Taking into consideration the purchasing opportunities of the residents of the UAE, the VAT to 5% will be negligible (Maceda, 2015, para. 6). However, it should be stressed that the bigger percentage will consequently lead to the decline in the consumer spending. The deterioration of the buying behavior will cause the industry to decline its production. The taxation on the luxury products will not be dramatic. To save the balance and to secure the families with the low income, the government should keep essential food products away from taxation. Andrew Prince, the expert in the finance states:
If VAT is implemented at low levels, say 3 per cent to 5 per cent on luxury goods such as computers and cars. The impact on low-income families will likely be negligible. But those who regularly purchase the latest smartphone or upgrade their car are the ones to shoulder a greater portion of the burden (Maceda, 2015, para. 6).
The UAE should undergo through certain economic changes to discover new revenue sources and to improve infrastructure. However, another issue with the VAT system is that it will affect tourists who will be obliged to pay taxes twice (in the UAE and their home country) as well. It should be pointed out that the UAE attracts thousands of shoppers across the globe. The major reason is the economy free of taxes and the variety of expats.
VAT and the Economy in the UAE
The Minister of Energy, Suhail bin Mohammed Faraj Fares Al Mazrouei, is sure that the dramatic decrease in the oil market will not have a significant effect on the UAE economy. The UAE Strategy Plan is centered on the improvement of the energy sphere. The government aims to reduce the dependence on the oil and gas and develops the program that will eliminate the connection between the economy and oil extraction. The powerful economic condition prevents the UAE from experiencing the economic difficulties. The pivotal intention of the UAE government is to make the country less dependent from the oil price. The strategy of the government seems to be successful as it reduces the dependence with every year.
Alternatives to VAT System
The major objective of the VAT system is to increase the amount of money received by the government, to avoid the cascading effect, and to provide the stable source of the revenue. Although, VAT seems to solve the issue with the unbalanced finance system, it should be stressed that it will not provide the solution of the core problem. From the one side, VAT is considered to be an efficient tool to implement fiscal reforms, to increase the revenue, and to eliminate the deficit. However, despite the advantages stated above, one should not forget the other side of the problem as VAT is a regressive tax and creates only the money mechanism (Lee, Kim, & Borcherding 2013, p. 541).
VAT will fill the fiscal gap but only by means of taking more money from the public (Paula & Scheinkman, 2010, p. 195). The major alternative of the VAT system implementation is the development of the business and the sphere of industry. The development of the industry will provide people with new job opportunities, will expand the export market, and consequently will stabilize the government revenue.
The improvement of the sphere of business and production will contribute to the independence of the UAE from the oil and gas sources. The other alternative of the VAT is sales tax. The system of sales tax is used in the United States and proves that the implementation of the sales tax can be rather successful for the economy of the country. The primary advantage of the sales tax is that it is more economically efficient than the VAT when it comes to collecting the tax. The system of the sales tax is simple, fair, and provides the government with the additional revenue. Moreover, it should be highlighted that the sales tax affect the consumers with the lower income in a less negative way than the VAT, and that is, should be taken into consideration while making the decision regarding the significant issue of taxation.
Conclusion
In conclusion, it should be stated that the tense condition in the oil market affects the economic and political strategy of the UAE. Although, the country is dependent from the gas and oil extraction, the government takes all the needed actions to reduce the dependence and to improve the living standards of the residents. The powerful economic of the UAE prevents the country from experiencing the severe consequences from the reduction in the price of oil. It should be stressed that the VAT is one of the solutions to the issue of unstable oil price, and it impact on the economics.
However, the government should take into account the strength and weaknesses of the new tax system. The development of the non-oil sector of the economy will have a positive effect on the economy of the UAE. The government should create programs and project to support small business and to develop non-oil sector. It should be pointed out that before the implementation of the VAT system every alternative should be considered and analyzed to omit the negative consequences of the system.
References
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Fernandes, C., & Karnik, A. (2009). Assessing UAE’s oil dependence: An optimal control approach. Education, Business & Society Education, Business and Society: Contemporary Middle Eastern Issues, 2(2), 138-152. Web.
Lee, D., Kim, D., & Borcherding, T. (2013). Tax Structure and Government Spending: Does the Value-Added Tax Increase the Size of Government? National Tax Journal, 66(3), 541-570. Web.
Maceda, C. (2015). How VAT in UAE will impact consumers. Gulf News. Web.
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Rahman, F. (2015). Low oil prices push GCC to consider VAT. Gulf News. Web.
