Good Tax

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Characteristics of a Good tax

Characteristics of a Good Tax

Key Principles in a Tax Policy

The primary purpose of taxation is to raise revenue to fund government expenditure programmes. Ultimately, different groups will have different ideas regarding the additional purposes of taxation. These will include redistribution and changing behaviour. It is up to governments to decide on the appropriate balance between these competing priorities, but, in all cases, the objectives should be achieved as efficiently as possible. From an aggregate welfare perspective, the ideal tax system would be "neutral", i.e. would not distort decisions in areas such as business investment and recruitment. However, policy priorities inevitably result in a non-neutral system. Instances where the tax system works in the different direction to non-tax policy objectives should be minimised. This requires those responsible for setting tax policy to be aware of other Government policy priorities. In the present economic circumstances, it is extremely vital that taxation policy must be implemented to boost not inhibit, economic growth (Clark, 2004, 159).

Role of tax policy in supporting growth and UK tax competitiveness

The competitiveness of corporate taxation does not only influence the decisions of internationally mobile companies to keep their operations in UK or other countries, but even an incremental investment decisions made by foreign companies for having operations in the UK. The UK's tax competitiveness has been slipping in recent years. The Coalition Agreement published in May announced the government's commitment to aim for the most competitive corporate tax regime in the G20. This is necessary for ensuring a stable and broad tax base, as well as a more vibrant economy. Many elements will inform a company's view of whether a country's tax system is competitive (Devereux, 1987, 85).

All taxes create distortions through their effect on prices. Prices are used by producers to set the most profitable level of production and by consumers to maximise their utility. The taxation of corporate income in the UK creates distortions over how firms raise funds (debt or equity finance), over investment decisions, and over decisions to incorporate. Recent research also shows a firm correlation between corporate taxation; wages and employment. An additional behavioural response for internationally mobile companies is to opt out of a tax system altogether. Where taxes are, levied on bases which are particularly responsive to price changes, the potential impact on behaviour and, therefore, growth is greater (Guest, 2006, 204).

Tax levels

Headline corporate tax rates are an important indicator of tax competitiveness, though not the only one. The UK's lead on corporation tax rates has been eroded in recent years, as other countries have cut their corporation tax rates further and faster. The UK currently has the 7th lowest rate of corporation tax in the G20 and the 20th lowest rate in the EU27. In 1997, the UK had the tenth lowest prime rate among the EU27 countries; by this year, it had slipped to twentieth. The introduction of the 50% personal tax rate has also affected the UK's ...
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