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Tax Law Module Summary
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Tax Law NotesLecture 1 – Foundations of Tax: The State and the Need to Tax.
Tax
Tax as it is known today has evolved from a series of factors. These factors could be because
of either personal needs or governmental needs. Although there is often a sense that a few
people like to pay tax, which may be the reason behind its evasion and avoidance; from the
time of the first payment of tax until date, tax has been seen as a required payment to the
government. Understanding the meaning and the need for tax is expected to give an
understanding of the compulsory nature of tax payments.
A tax is a payment exacted by authority, from part of the community, for the benefit of the
whole. From whom, in what proportion such a tax a payment shall be required to what uses
it shall be applied, those only are to judge to whom the government is entrusted.
James and Nobes define tax as ‘a compulsory levy made by public authorities for which
nothing is directly received in return’.
Types of Tax:
- Income tax and capital allowance
- Inheritance tax
- Capital gains tax
- Corporation tax
- VAT and stamp duty
- E-Commerce transactions
- International tax – tax avoidance and tax evasion
Tax law
Tax law is generally seen as the body of legislation and polices through which a government
has a claim on taxpayers for their tax liabilities. The authority to levy and enforce taxes is
accepted as a right of governments. Commonly, tax concerns only the legal structures of
taxation and not the financial and economic structures. The making of decisions regarding
the different types of taxes including the rates, is deemed political and does not fall under
tax law or legislation. Consequently, tax law could be seen as an instrument, which
politicians use to control the economy.
Tax for Social Structures
- Tax payment are compulsory and as such must be paid. This does not allow room for
tax avoidance or evasion and consequentially, deterrence and enforcement
measures will apply at the failure to comply. When we have a good tax system – the
government provide sustainable structures. Deter you from not paying tax. Self-
contractors for example are trying to avoid paying tax, but this stops this occurring
by enforcing measures. Taking you to court or closure of a business because you are
avoiding paying tax.
- Governments as public authorities have the right to impose and collect tax.
- The presumption that nothing is expected in return negates the benefits theory of
taxation, which is built on the philosophy that taxes should be imposed in proportion
, to the benefit received. Despite this, considering that tax revenue is used to fund
public needs, something in essence is received in return for the payment. To this
end, taxes can be seen as a means of national economic development.
- Perceiving tax as being a levy carries the presumption that every required payment
to the government could be a tax. Taxes have been used to services government
plans and needs, which invariably from the main objective of taxation.
Principles of ‘good’ Tax
Adam Smith: “the Wealth of Nations” – 4 principles.
- Fairness
- Certainty
- Convenience
- Economy
Tax is used as a way of affecting behaviour, used for specific purposes it can discourage the
use of alcohol, cigarettes or sugary drinks.
Adam Smith’s Canons of Taxation and Meade Committee List.
According to the Meade Committee Report [1978], a good tax structure must take into
account many factors: the effects on economic incentives; its fairness as between persons of
similar taxable capacity; its effects upon distribution between rich and poor; whether it is
compatible with desirable international economic relations, and its simplicity, ease of
understanding and absence of excessive administration costs. The list is of great importance
since it shows how matters have developed since Adam Smith listed his famous ‘canons of
taxation’, 200 years ago in the Wealth of Nations, i.e. that the tax should be charged in
proportion to ability, that it should be certain not arbitrary, that it should be charged at a
time which was most convenient to the taxpayer and that the costs of collection should be
as low as possible. The Meade Committee list, with its emphasis on matters of efficiency and
international relations, reflects the influence of what economists known as the optimal
theory of taxation. An altogether different approach uses benefit theory; tax should be
charged, and payers pay because they receive benefits from the state. This is an old and
generally unfashionable approach. Whichever list is chosen, some way must be found of
overcoming the conflict between these different criteria. The extent and nature of that
conflict depend upon to which school of economic thought one belongs - reconciliation is
more difficult for older views of economics than for the optimal tax theory. A third school of
economic thought, public choice theory, must also be examined. We first consider the
criteria in the light of the older approach which has dominated both Royal Commissions and
so much government thinking and rhetoric.
Tax Systems and the Need to Tax
Tax systems are central to society as they are the channel through which governments
generate the revenue, they need to maintain public expenditure. Additionally, they are
regularly the direct instrument for policy implementation. The effectiveness and efficacy of
tax systems has an impact on every citizen that is far and above the collection of tax. This is
necessary as it determines the level of benefits obtained by the government. Tax systems
can perform multiple roles: raising revenue, redistributing wealth and regulating behaviour,
e.g. through excise duty on alcohol or green taxes. These roles may be achieved in several
,ways by taxing spending, through value added tax (VAT). This is more efficient than sales tax
in America, as the tax has already been added before you go to pay for a product or service.
PAYE collected before you receive your salary. This is efficient.
UK Tax History
1662 – hearth tax
1696, 1784 &1787 – window tax
1795 – hair powder tax
1796 – dog tax
1797 – watch and clock tax
1799 – William Pitt – Finance Napoleonic Wars
1802 – repealed by Addington
1803 – Addington intro – a new income tax with 5 schedules
1816 – repealed at the end of the war with France
Between 1816 and 1842, there was no income tax, only “goods” taxes were imposed, such
as cloth and brandy imports and food imports.
1840s – repeal of the corn laws and introduction of annual income tax as a replacement.
In 1842 Sir Robert Peel (Tory) re-introduced income tax.
The 2 World Wars increased the rate of income tax.
1914 – by contrast, USA only got a standard income tax in 1914
1988 – poll tax
2010 – bank bonus tax
Today, income tax is annually levied in the March budget and confirmed by Royal Assent in
July. Finance Bills and Acts from 1910-2020 legislation that sets out the taxes, duties etc.
with the principal tax rates being one of its main focus.
Difference between tax and a fine
At first sight, it might appear that there is no difference between a fixed rate of fine and a
tax, but the power of the court to vary the normal fine and to enjoin against continued tax,
breach, marks off the breach of the criminal law from the carrying on of a taxable activity.
Fines or penalties imposed to regulate an activity are more complex; penalties imposed to
encourage prompt compliance with filing or other requirements are really more in the
nature of the late filing charges or interest charges than fines.
The distinction matters because traders may not deduct fines in computing their taxable
profits but may be able to deduct taxes. The status of property seized by the state is not
explored in the case law, although it has been suggested that the effect of the statues such
as the Proceeds of Crimes Act 2002 is to treat forfeiture as a fine in specie.
Types of Taxes
Direct tax (a direct tax is one that is demanded from the very persons who it is intended or
desired, should pay it. This is usually tax on income, property or profits. In a strict sense,
under a direct tax, the incidence of this tax cannot be passed on from one taxpayer to
another either in the form of wages, dividends, goods or services. In other words, the
taxpayer must bear its burden. Taxes such as income tax, capital gains tax and corporation
tax are classified as direct tax). These are non-transferable.
- Income tax – tax levied directly on personal income.
, - Corporation tax – tax levied on companies’ profits. It can be argued that the burden
rests on the consumer instead of the corporation.
- Capital gains tax – a tax levied on a profit from the sale of property or an investment.
Money you make from the sale of property does comes back to the government.
- Inheritance tax – in the UK this is a tax levied on property and money acquired by gift
or inheritance.
- Stamp duty – a duty levied on the legal recognition of certain documents.
Indirect tax (are those taxes that are demanded from one person in the expectation and
intention that he shall indemnify at the expense of another taxpayer. These are charged on
the realisation of assessable goods and services, which is eventually paid by the consumers
of these goods and services. Such taxes include Value Added Tax (VAT), sales taxes
(US/Canada) and excise and custom taxes).
- Value added tax (VAT) - a tax on the amount by which the value of an article has
been increased at each stage of its production or distribution.
Classification of Taxes
Taxes are broadly classified in two categories – direct and indirect. The distinction between
direct and indirect taxes in some countries is not fundamentally important, as it has been
attributed to be more of a historical significance than a current importance.
The most importance aspect of the direct taxes is the income tax that is said to account for
up to one-third of volume revenue raised in modern developed countries. The income tax is
levied on the profits of both individuals and corporations alike. Income generated by these
taxes together with the VAT, have accounted for government revenue in both developed
and developing countries. Although different countries classify and structure their income
tax specifically the corporation tax differently, there is a very global influence on how this is
done.
- A direct tax is one which is demanded from the very persons who, it is intended or
desired, should pay it.
- An indirect tax is one which is demanded from one person in the exception and
intention that he shall indemnify himself at the expense of another.
Taxes can also be classified as being proportional or progressive and regressive. A tax is
classified as being proportional and progressive, when it increases with an increase in the
taxpayer’s income. If there is no increase in taxpayer’s income, then the tax liability stays
the same level (flat rate) with the income and is then proportional. This tax is largely
targeted towards the rich and to higher income taxpayers rather than lower income
taxpayers. On the other hand, regressive taxation occurs when the tax rate decreases as the
income increases. In this situation, the tax liability does not rest on the taxpayer’s ability to
pay, rather it rests on the percentage of a service or goods purchased by taxpayers. This will
mean that low income earners, will pay a higher amount of tax than higher income earners.
- A proportional or neutral tax is one which takes a constant proportion of income.
- A progressive tax takes an increasing proportion as income rises.
- A regressive tax takes a declining proportion of income as income rises.
The UK tax system contains a series of separate but sometimes overlapping direct taxes. Of
these, traditionally, the most important has bene income tax. Such a tax has many
advantages. The evidence suggests that, at least in the absence of very high tax rates, it has
a smaller disincentive effect than other taxes, that it is the most effective tax in
redistributing income, that it serves as a strong, built-in stabiliser by collecting more money
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