Posted: October 17th, 2013








Part A: Why the UK government taxes its citizens

U.K taxation involves payment to the central and local government. In 1963, the U.K spent 12 billion a year. Currently, it spends over 600 billion. Due to the great recession suffered by the U.K in the past decades, the U.K is forced to levy taxes on its citizens, as there is a big gap between the cash inflow and outflow in the government. By levying taxes, it reduces the amounts it spends. Until 1930, the government could balance their budget and money levied from taxed was used to pay government expenditure. The government could also resort to borrowing from the economies private sector or even abroad. Though government borrowing could be quite large especially during some war periods, it did not destroy the balance budget principle.

In 1945, budget deficit became a norm in the UK. The government has financed the sale of publicly owned assets in the 1980s, which are limited since they are sold once. In this case, the government had to find another way of raising enough revenue to finance their expenditure through levying taxes. UK is going through a world economic crisis now and, it is therefore, forced to tax its citizens. The current crisis focuses on the Euro Taxation in the UK has Bridged the gap between the rich and the poor. The rich are taxed highly and the poor taxed low. This is done to fulfill the canon of equity so that the poor are able to survive on there little income. Tax is used to redistribute wealth in the UK. Tax money of the rich and the middle class will be used in funding benefits program for the low-income persons in the population, therefore, redistributing wealth.

A progressive taxation system is adopted to enable equality and wealth between individuals. The UK economies pounds are used to reprise its items all through its economy. The subsidizing of some products and goods reprises them. The governments will subsidies a product by making a difference between the fair market value of the product. This includes what should be made out of the product according to the government. They subsidize by making payments to the seller using the taxpayers’ pounds. People’s interests will be represented by elected officials to keep the scheme of taxes fair. People are free to oppose any unnecessary tax. When they fail to do this, they will be liable to unwanted tax. In most cases, taxpayers seldom resist tax increased by the central government. Despite this, representation still exists. UK carries out taxation to avoid the current losses of more than £20 billion a year it makes. This is currently with their debt still being handled at the current rate. Taxation prevents most of the pressure in the NHS where the sixth formers lack maintenance allowances and go on a national strike in the UK (Macht, 2001).

The main purpose for the UK tax system is to reduce the tax burden, which can be calculated by the GDP percentage taken from the taxes. Secondly, to improve incentives since government reduces tax rates on proceeds and business profits. This helps improve incentives and generate capital in the nation as a way of enabling long-run growth. Thirdly, UK spends the money from the tax than income. This is to move the balance of taxation from income tax towards taxes on spending since income taxes have an effect on work incentives. Lastly, UK government uses taxes in a way that make markets work better. It also considers externalities. The government uses the tax system to correct market failures in this case.

A good tax system should be efficient, equitable, transparent, certain, flexible and understandable to the user. In UK, a progressive tax systems rate of tax rises with income. The average tax rate rises from five percent on incomes ranging between £7,500. The systems are not progressive as it was twenty years ago. Its progressive nature has reduced over the years. Before 1979, the highest rate of income tax was 83 per cent, with a 15 per cent extra for investment income. Currently, taxpayers are experiencing the same rate of tax of twenty-two from the rate of forty per cent. The national insurance contribution is eleven per cent and those earning more pay one percent extra. This makes the 33 per cent, and 41 per cent total rates.




















Part B: Comparison of UK tax system with that of the United States

Since the local revenues are small in the UK, the central government revenues are a greater fraction of the overall government revenues. However, there is a federal government system in the US and important local revenues. The indirect taxes comprise 87 per cent of the local level and state revenues. The US direct taxes are having a higher fraction of Gross National Product than in the UK. Low-income earners are taxed heavily in the US because of the net social security contributions. In the UK, those taxed heavily are the on middle- and higher-income classes (Smith, 1970)

The United States depends on the corporation income tax than the UK does. Tax nominal rate in the UK is higher than in the US, though the structures are different. The UK has used a procedure of integration in handling individual and corporate income tax. Its basic rate is 38.75 per cent that is withholding tax on individual tax at source. In the US, expenditure is less as compared to the UK. The UK levies high taxes on tobacco and gasoline. US, on the other hand, levy high taxes on liquor. The U.S. tax system has gone through changes that have shifted the tax system in a less progressive direction. First, there has been a

Reduction in the rates of personal income

In 1960s, the legal individual tax rates applying to the dollar of the top incomes was 91 percent. On 1998, it reduced to 28 percent and went to 39.6 percent in 1993. In 2003, it reduced to 35 percent. Secondly, as a portion of gross domestic product, corporate income taxes have dropped from 3.5– 4.0 to 2 percent of GDP. Corporate profits, on the other hand, as a share of GDP remain the same over time. This shows that owners of capital above average incomes earn greater net taxes today.

Thirdly, payroll tax rates managing Social Security retirement benefits and Medicare have risen. There has also been a rise in the employee and employer tax rate on labor income from six to15 percent. Moreover, the Social Security payroll tax is a minor tax burden. In conclusion, these three changes have reduced the progressive nature of the tax system in the US.

In US, someone giving cash is able to use his tax return to remove from his or her income the value of cash given before calculating the income tax. In the UK, fewer people fill a tax return to manage their income tax using the PAYE system. Due to this, UK manages this differently. A taxpayer earning less, therefore, paying low tax can claim the tax paid on their cash they have donated. The taxpayer can claim back the difference if it is a higher rate. Tax paid on donation is claimed back in both countries

A UK resident who is not domiciled there is liable to income tax on all income sources and gains. He can register to be taxed in such a way that he will only be liable on UK tax on overseas income. A person who has been a UK resident for seven out of the previous nine tax years should pay a yearly UK tax charge of £30,000 to claim the payment basis. This applies when he is not domiciled there. UK offshore anti-avoidance provisions review income and gains in offshore structures to tax on behalf of beneficial owners. This applies only to individuals who are UK residents

Residency is a crucial factor for UK tax exposure. The US, on the other hand, taxes the worldwide income and capital gains of all its citizens, permanent residents who hold the green card and person’s tax resident.  This tax applies to citizens and green card holders irrespective of where they live. US persons, who are not residents like the employees on secondment, usually are not informed of the US worldwide tax net. They, therefore, do not adjust their investment portfolios. The US has a broad set of anti-avoidance regulations that often affect many categories of non-US investments. Lack to enquire into the tax description of non-US investments may result in seriously unpleasant tax penalty.

US federal tax applies to common income at marginal rates of up to 35% and assets gains seized for more than a year at 15%. Where varieties of offshore anti-deferral rules exist, unpleasant outcome may follow. Two offshore anti-deferral rules pertain to investments through trusts or holding company structures. One of them applies based on if the investment may be negatively classified. When the gains in investments negatively classified are taxed highly, ordinary income earners suffer additional interest charge compounded in the duration of the holding period. Few investors may take reassurance in knowing that tax and interest charges may not exceed gain amount. Other investors prefer to avoid the relevance of these rules.

In both the US and UK there exist intermediaries that can act as tax competent medium. These intermediaries choose from private trusts formed by the individual to well-known bodies such as Community Foundations. However, in the US, these models have become advanced.  They have allowed the creation of Charitable Remainder, trusts which grasp the donor’s capital and make accepted annuity payments on that capital. The donor or the Charity can receive these payments and the other part finally getting the capital. In both countries, the donor will get the tax break, but in the US, the tax break can be taken on donations involving difficult financial arrangements.



Work Cited

Macht, N. L. (2001). Taxes. Philadelphia: Chelsea House Publishers.

National Bureau of Economic Research, & Brookings Institution. (1964). The Role of direct and indirect taxes in the Federal revenue system: A conference report of the National Bureau of Economic Research and the Brookings Institution. Princeton: Princeton University Press.

Smith, K. H. (1970). Taxes. Minneapolis: Lerner

Tarrytown, NY: Marshall Cavendish Benchmark.


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