PART 1 INCOME TAX
The tax systems in present day use have grown from different ideas in government as to how to raise money for government expenses. Until now no one has analysed the systems for efficiency and to see what is best for the country and community.
The result is that various taxes are raised against businesses and individuals for a variety of reasons but the system as a whole is totally inefficient.
Let us look at Income Tax.
It was decided a long time ago that people should pay tax on the income that they earned and it was believed that the more people earned the more they should pay. This was seen as a means of reducing the wage gap between the high earners (rich) and low earners (poor). So more sophisticated systems were developed with graduated tax tables and PAYE systems. There were other factors introduced so that allowances and benefits got added to incomes. It is a tax that is generally hated.
It called Income Tax and everything about it says that the employees are paying the tax.
Time to face reality.
Individuals pay income tax on their earnings, but in truth it just adds to the cost of employment. The employer pays more so that the employee can pay the tax. It can easily be turned around to be a tax on employment paid by the employer which would then make it unacceptable. In actual fact it is not only the businesses but government as well who pay more so that the employee can pay the tax. It makes no difference to the employer if he pays the tax and then pays the employee his net pay.
So let us turn it around and have the employer pay the tax. As far as the government is concerned they will be paying the tax to themselves so they could do away with it. Now the businesses will add the total cost of paying the employee, that is the gross wage as it stands or the tax and the net pay if it is changed, into their costs.
Equally individuals pay other taxes and licences from their net pay. Which means that businesses effectively pay extra so that employees can pay the other taxes levied upon them such as council taxes, TV licences and so on. The business sector could pay those taxes for them and reduce their incomes. The end result is that the business sector effectively collects and pays all of the taxes to government.
Take any set of company accounts and separately show the taxes paid by employees from their income, and then isolate and show all the taxes that are paid by the company to prove this statement. All the taxes in all their forms will be there with a few exceptions.
While the business sector pay all of these taxes it will be found that they actually pass all of the taxes on to the consumer in the price and at the end of the day it will be found that it is the consumer who bears the cost of and pays all of the taxes when he pays for his goods and services.
When a consumer purchases goods and services he not only pays VAT which he fully appreciates, but also in the price are all the other taxes which are hidden in the costs of the various businesses.
Following on that one can appreciate that the taxes paid by the consumers go through the business sector to the government.
The book ITS ALL IN THE PRICE by Peter William Bailey shows that all of these taxes could be included in an increased rate of VAT tax and the end result would be a large saving in production costs with no increase in the end price of locally produced products and services.
The government in its turn pays the salaries and wages of its employees and deducts income tax and raises other charges on those employees. In addition those employees pay rates and taxes from that income so that in turn the government incomes could be reduced by all these taxes and this would result in huge savings in government expenses. This would result in a lowering the tax rates required to fund government. Remembering always that government income comes from taxation.
In today’s world the change from all these varied taxes to a single VAT system becomes absolutely essential to make the business sector competitive and to spread the burden of taxation to imports. It has never been appreciated that imports do not carry their share of the tax burden. Customs and excise duties have been raised to avoid unfair competition against local production but governments have often advocated free market competition which then makes the change to a VAT system of taxation imperative.
A DIFFERENT LOOK AT THE PRESENT TAX SYSTEMS
My father some sixty years ago showed me an article in a newspaper when British Rail complained about the high rate of personal taxation in Britain. Their complaint was that it would cost them £90000 pa to give their CEO a £5000 pa increase in pay because the top rate of income tax was approximately 90%. This high rate of taxation was intended to reduce the wages gap between the rich and the poor.
The travelling public paid the £90000 in increased fares. This illustrates how the consumer pays the income tax.
Some 2 years later there was a change in the tax rates to say 50%. Now the CEO gets a huge increase in his net pay which was not given by his employer and for which there was no justification.. The travelling public did not get any of the benefit because as income tax it goes to the individual.
So here is an example of how government decisions create inflation. In addition the net pay differential between the rich and the poor got considerably larger. All about government decisions on income tax.
This is an extreme example but highlights how bad income tax is and how it is not actually when we pay our taxes and has often been misconstrued as a means to reduce the wage gap.
There are many examples of businesses moving their manufacturing plants to China and other Asian countries to take advantage of cheap labour. There are examples of financial institutions taking advantage of these same cheap labour markets to reduce their costs/increase their profits.
None realise that their home market suffers from the reduced spending power due to the reduced earnings. Their market place is partially being sustained by unemployment benefits which are increasing the rates of tax required to sustain government.
This should prove that governments should change their tax systems to obtain the lowest production costs and it is vital that people work to earn an income to live. As production increases so spending power in the economy must increase and tax receipts will increase. Using cheap labour to produce goods for sale in countries like America and Britain is unsustainable because as unemployment in those countries grow or standards of living go down so their tax requirements increase and production and other costs will increase.
Governments have not yet realised that they can change their methods of taxation to make the business sector more competitive and the necessity to maintain employment levels and the standard of living to maintain their market place.
INCOME TAX CAN AND MUST GO.
During the Best Period of Economic Growth in U.S. History There was NO INCOME TAX And No Federal Reserve.
This was the title of an article written by Michael Snyder on August 8th 2013. He points out that between the civil war and 1913 the US economy experienced explosive growth when there was no income tax. This would be true because there is every incentive for people to go into business, or should I say there were no disincentives.
It is possible and necessary not only to get rid of income tax but others as well.
Part 2 Company Tax and others
Company Income Tax was once described as an appropriation of profits. Now we have to look at it as a tax on the profits that has to be paid before the shareholders get any dividend. It is really a cost to the business.
Businesses will now work out budgets and company tax will be worked out on anticipated profits to provide shareholders with some idea of their returns on their investment. Tax is very much a cost and will influence the decisions of the company in respect of capital investments in particular.
These taxes have been accepted for years without question but in an extremely competitive environment it needs to be re examined.
Business profits are subjected to a tax usually calculated as a percentage of the earnings. There are capital allowances given to companies to encourage capital investment in buildings, machines, vehicles and other items to improve production and reduce costs. These allowances will often reduce the need for people. From an employer view point it is better to put in machines and replace labour in factories. Machines do not complain, do not need tea and lunch breaks and do not have Trade Union representation demanding more wages and better conditions. However machines do not require the products and services produced by the businesses either.
Now put it another way. Would government give these allowances in the knowledge that this would reduce the number of people in employment and so reduce the spending power in the economy, which would reduce the income to the business sector as a whole and taxes to government. In addition it would increase the taxation needed by government and levied on business to pay for the additional unemployment benefits that would be required.
Put this way it becomes difficult to accept but it does make it easier for governments to dispense with company taxes altogether.
This would reduce the amount of profit required to be made by the business to provide the same dividends to the shareholders. It allows the prices charged for the goods and services produced to be lowered and the tax lost can then be picked up as VAT at the end.
Business and Government need to know that their market place is generated from the earnings of the community and if there is unemployment and reduced wages then the market place will be diminished. Governments should not be encouraging the replacement of staff by machines but greater employment. Nevertheless it is essential that businesses maintain efficiency. One may need to review working hours to maintain employment levels.
Government’s tax, as will be shown later, comes from the spending power of the community. The higher the earnings of the community, the higher the returns to business and the greater the tax receipts. That is how the economy works.
Machines are not consumers and are not tax payers and are not voters. There are many science fiction movies which show where populations have been wiped out and replaced by machines.
RATES AND LOCAL GOVERNMENT TAXES
Apart from Government taxes there is often another lot of taxes collected by local town and city councils. These taxes come from people in the community and businesses in the cities and towns. The taxes which include licences are to provide the areas with services such as roads and cleaning and waste removeal and so on. But on a full analysis where does this tax come from.
The people paying the taxes get their income from the businesses and the government sectors. Part of their earnings are spent on these taxes and licences. We could change the system so that the employers paid a rate of tax which would mean that the employers reduce the wages and save the employees paying the taxes leaving spending power in tact.
Now in addition the businesses also pay rates and licences etc on the premises that they occupy. One way or another the businesses pick up the costs of all of the rates and taxes, one could say except those of government employees, but these are included in the taxes that they pay. We now must appreciate that these businesses pass on the cost of these rates and licences etc to the consumers in the prices that they charge.
End answer the consumer is paying all of these taxes in the prices that they pay for their goods and services.
There has been a considerable increase in Internet Selling and a complaint by shops that it is unfair competition because they do not have to pay the high rates and rentals of shops. There has been a further problem in so far as these companies are often international companies and will ‘offshore’ sales to avoid high company taxes. Governments need to recognise that they will receive less tax if shops close and internet sales increase. They can alleviate the situation and change their system of taxation. These taxes can be collected in the VAT charged and distributed to the local government authorities.
This then strengthens the argument to change to a pure VAT system of taxation.
One of governments later innovations on how to increase government revenues is the introduction of road tolls. A charge on vehicles travelling on certain segments of roads to pay for the upkeep of the roads. Governments are responsible for the upkeep of the infrastructure in whatever form it may be. The tax is just a means of increasing government income or reducing government expenditure. Governments constantly look for ways and means and reasons to raise taxes. Who pays the tax? A large proportion will be paid by businesses who will pass their costs onto the consumers which is the community. The rest is paid by the community and reduces the spending power available. This in turn diminishes tax income.
All taxes are basically paid by the community at the end of the day.
HOW ABOUT THIS :
When a change is made to a largely VAT system not only does it create a tax haven for investors it concentrates government efforts into growing business and employment opportunities with improving standards of living.