The Comprehensive And Flat Tax System Economics Essay

The Comprehensive And savorless value System Economics EssayThe spaciotemporal income value corpse in its psychel rule enjoys a good reputation referable to the structure which is found on the ability to salary principle. In general this principle points out that valueationpayers with the aforesaid(prenominal) low train of income argon valueed at the same score and the unrivaleds with high income atomic number 18 measure incomeed heavier. 4What thrusts this task ashes pull down more prepossessing to countries is that due to the equalization of peachy and churn income, in that respect is no worry in income shifting. This would be a so c onlyed value arbitrage profit. That means it is more profitable to transform bear on income into big(p) income and pay less taskes due to the different task burden betwixt labour and crown income. 42.1.2 Disadvantages of the comprehensive valuate governance 42.2 Flat Tax 52.2.1 Advantages of the prone measure income frame 52.2.2 Disadvantage of the flat revenue enhancement trunk 5IntroductionIn this cover I go forth discuss the so c al champi championd two-fold income levy. This strategy is considered to be mavin of the most auspicious receipts enhancement alternatives to existing gross administrations. This paper is build up in three big chapters. first I will describe the environment of the actual revenue enhancement placements. On the one accomplish there is the system which is hired in almost entirely in all atomic number 63an countries, the so called comprehensive mortalal income revenue enhancement. And on the some otherwise wad the flat tax system, which evict be found in the Este-European countries. Secondly I will point out more accu regularisely the development of the Dual income tax system with its mayor advantages and disadvantages. Finally I will draw my personal conclusion to the dual income revenue enhancement system, its possibilities and futu re evolution.The major objectives of the receipts system in a verdant are clearly to earn as a good deal tax affordable to obtain a solid and running state. This aim is collateral with the idea that e truly(prenominal)body pays the tote up of taxes one has to pay gibe to the ability to pay principle. Therefore leave as little as possible chances to cheat. Aligned with this aim the system should drive two additional targets, beauteousness and rest. Fairness as a basis requires a system to be fair in the way that people with same income should be taxed in the same way. Simplicity should puzzle out taxpaying as easy and efficient as possible. This means in an ideal world there would be no exceptions or special tax treatments.Through globalization, easier and faster communication, many a nonher(prenominal) people start to find more and more possibilities to optimize their tax expenditures. This, for example is possible by investing in foreign countries causing harm to the ow n. As a consequence of missing tax income and loosing the possibility to keep up the states standards, a budge in form of a reform is unavoidable. There are as many possibilities as there are countries on earth to reform a tax revenue system, by raising / lowering taxes or changing the exclusively system to become more cute again. I will now present 3 cautionary systems.The comprehensive tax systemThe comprehensive income tax system to a fault known by other synonyms as global income tax, unitary income tax or synthetic income tax is the most commitd tax system in western European countries. It has got its name due to the fact that all income types are seen as a one and so are added together and taxed as one whole income. In Germany it was installed in the late 1950, and since then has been presented of many tacks from its original form. It was seen as the ideal tax system in Europe because in its original form it could align fully with the ability to pay principle and to both tasks of simplicity and fairness. This method is composed as a system which adds together all the taxpayers income (from labor, cap, rent and line) in a oneness measure and taxes it with a single modern tax.Labour income is usually defined as income get from activities as an employed individual.Capital income chamberpot take a variety of forms such as dividends, interests, income from authorized estate and to add further complications big(p) income is not always from a single organization, but hatful come from pension funds, spirit insurance companies, corporations, banks etc.Business income is income earned out of entrepreneurial activities. usually the negligible subsistence level remains tax free. Income surpassing this nominal level is typically taxed on a progressive scale. For example in Germany it starts with a tax rate of 15% and ends up as high as 50%. Losses of one income type can be offset with gains from other sources. nonpareil tax rate will then be a pplied on the taxpayers total income (Synthetic revenue enhancement system).The idea behind the comprehensive tax scale is the assumption that someone with higher(prenominal)(prenominal) income is able not exclusively in absolute but alike in relative numbers to pay a higher share of his earnings to the government. This is by the majority of the most western cultures felt as a fair distribution of the tax burden also called tax fairness. This is the reason why there is a progressive tax table lying behind this structure.2.1.1 Advantages of the comprehensive tax systemThe comprehensive income tax system in its ideal form enjoys a good reputation due to the structure which is based on the ability to pay principle. In general this principle points out that taxpayers with the same low level of income are taxed at the same rate and the ones with higher income are taxed heavier.What makes this taxation system even more attractive to countries is that due to the equalization of detona tor and labour income, there is no interest in income shifting. This would be a so called tax arbitrage profit. That means it is more profitable to transform labour income into capital income and pay less taxes due to the different tax burden between labour and capital income.2.1.2 Disadvantages of the comprehensive tax systemAlthough this taxation system seems to be clear and easy, when installed and worked with there are always specialties and exceptions. These treatments were implemented during many years and destroyed the purity of the comprehensive system. The special treatments came along with a high amount of administrative costs and a loss of the simplicity. The possibility of the capital income to become negative and be cleared with the labour income is just one example. This even can be seen in the tax declaration. Hardly anybody is capable to hand in a correct tax declaration without concerning a tax accountant.All countries with the comprehensive taxation system implied special tax treatment for a particular type of income (e.g. pensions, capital gains or drawing wins) to grant a tax relieve. But there is no systematic reason that for example drawing off wins stay completely income tax free in Germany. Theoretically the State should levy taxes to set about income for documentation its public tasks, as production public goods (eg. Schools, streets). It should not use the taxation system to channel the expense and investment behaviour of its citizens and tax payers. By doing so the systematic foundation, the justification and the acceptance of the comprehensive taxation system gets lost.The maximum rate should in no case surpass the 50% level because it is perceive as unsporting from the tax payers when more than half of the money earned has to be transferred to the government.Some decades agone Sweden had a maximum tax rate of 90% with the consequence that people had no incentive anymore to generate income and well-tried to transfer their inc ome stream to foreign countries. This proceeds is described as a so called Laffer curve. (It is used to illustrate the concept ofTaxable Income Elasticity(thattaxable incomewill change in resolution to changes in the rate of taxation). The curve is constructed bythought experiment. First, the amount of tax revenue raised at the extreme tax rates of 0% and 100% is considered. It is clear that a 0% tax rate raises no revenue, but the Laffer curve hypothesis is that a 100% tax rate will also generate no revenue because at such a rate there is no protracted any incentive for a rational taxpayer to earn any income, thus the revenue raised will be 100% of nothing. If both a 0% rate and 100% rate of taxation generate no revenue, it follows thatthere must exista rate in between where tax revenue would be a maximum. The Laffer curve is typically represented as a stylized graph which starts at 0% tax, zero revenue, rises to a maximum rate of revenue raised at an intermediate rate of taxati on and then falls again to zero revenue at a 100% tax rate. One potential result of the Laffer curve is that increasing tax rates beyond a certain(a) point will become counterproductive for raising further tax revenue because of diminishing returns.)2.2 Flat TaxAn alternative to the just described global tax system is the so called flat tax system. Herewith a flat proportional taxation for all net income types, capital, labour and other income is installed. This taxation system does not consider the taxpayers ability to pay taxes but sets a flat level for all income types. Some east European countries (Russia and Slovakia) bring installed this taxation system. Russia replaced its progressive taxation system with a single flat tax rate of 13%.(Under a slender flat tax without deductions, companies could simply, every period, make a single payment to the government covering the flat tax liabilities of their employees and the taxes owed on their business income.For example, sound off that in a given year, ACME earns a profit of 3 million, pays 2 million in salaries, and spends an added 1 million on other expenses the IRS deems to be taxable income, such as stock options, bonuses, and certain executive privileges. Given a flat rate of 15%, ACME would then owe the IRS (3M + 2M + 1M) x0.15 = 900,000. This payment would, in one fell swoop, settle the tax liabilities of ACMEs employees as well as taxes it owed by existence a firm. Most employees throughout the economy would never need to interact with the revenue authorities, as all tax owed on wages, interest, dividends, royalties, etc. would be withheld at the source.)2.2.1 Advantages of the flat tax systemAim of this taxation method is to gain a very simplified and transparent Tax system. Those who perceive the comprehensive taxation system with its progressive effects as unfair often are in favor of a flat tax system and claim it to be fairer to apply the same tax rate to all income sources and amounts.Beca use there is only one tax rate for all income, the administration costs are in spades lower and there is a balance between lower tax and lower cost. Additionally every taxpayer can easily calculate his taxes due which are usually not the case in the very complex progressive taxation system.After Russia installed the flat tax the real revenues from its Personal Income Tax rosiness by 25.2%, 24.6% and 15.2% in the first three years.2.2.2 Disadvantage of the flat tax systemDespite all the Pro tunes the conundrum of the flat taxation system is that unattackablely any country could keep it as a fully flat income tax system due to too many special tax treatments. Because everybody has to pay the same percentage of his total income the ability of pay performance is not considered or minded. This is the biggest contra stock of the flat tax system. It only seems to be a fair system but leaves only a small to no gap for a fair sharing of the tax burden.For many people it is not convincin g why rich people should only pay as much as the poorer. And therefore it can hardly survive.In Addition to fairness another(prenominal) adverse point is the fact of the pure flat tax system that the government loses its power to steer the investing behavior. So if it would be of interest to support the hole-and-corner(a) pension reserves, a deduction of capital income taxes on these payments is not possible.The Dual Income TaxDevelopment of the Dual Income Tax (DIT) systemThe Dual Income Tax (DIT) is a combination of both of the recent presented tax systems. It is not a plain comprehensive system with a single progressive tax development or a flat tax with only a proportional tax, but a combination of both. It attempts to tax the personal capital income at a uniform (low) proportional tax composition maintaining a (higher) progressive rate on the labour income. This taxation system was first introduced in Denmark 1987, other northern countries as Finland, Norway or Sweden follow ed.Until today the Norwegian system is seen as the most experienced one and is seen as very respected for the consistency with which it was implemented. Until today the system as such had to be subject to changes.Germany introduced the dual income tax system in 2009. Income was taxed according to the global tax system with the progressive taxation method whereas capital income was taxed deducted at source at a rate of 25 %, without exception.A rum aspect of the dual income tax system is the problem of how to distinguish labour from cpital income when the two are composite together. A typical example is the business man who provides labour and capital with one business. These types of business are tempted to declare their gains of labour as capital income to avoid the higher progressive tax. The Finnish Government countered this problem with a division of dividends paid by unlisted companies into two components. Each half is then hardened as either labour or capital income.Advanta ges of the Dual Income Tax systemA country with lower capital income taxation becomes more attractive to foreign investors with a higher local capital income tax. This also has a positive effect on the attractivity of corporate investments. The further positive usurpation on the economic development is obvious.The generation of capital income tax by collecting it at its source, creates a higher possibility of tax payment in comparison to individual tax declaration.The incentive for capital exports and tax avoidance is let downd by a lower tax rate on capital income. It also diminishes the risk of tax evasion.Neutrality or simplicity means an equal treatment of capital income tax without personalized deductions or any other special handling.The main tax income which is raised for public pay can be brought up alone by the labour income tax.Disadvantages of the Dual Income Tax systemCompared to the comprehensive taxation system, the dual income tax system has left the tax arbitrage is theory open. This is the (income shifting between higher-taxed labour income and lower-taxed capital income) to gain the difference between these two tax rates. Nevertheless it can reduce the incentives of capital exports to cheaper capital income neighbor countries.A common mentioned disadvantage of the dual income tax system it the so called problem of the double taxation. This taxation problem does not only exist in this taxation system but is characteristic for this system. Double taxations is ataxationprinciplereferring to income taxes that are paid twice on the same source of earned income. The problem herewith is the question when and how the best way is to tax capital income. The current scheme taxes the first time when earned as labour income. The taxpayer now has got two options, one would be to consume directly and have no further problems. In times of shrinking pension accounts many people prefer to save the money in forms of capital investment eg. shares, bonds The r eal dual taxation problem now appears when these capital investments start to pay their interests or dividends. The argument behind this contra argument is that the capital to buy a investment was already taxed.3.4 The dual income tax system in Germany and its impactIn this section I will outline the general impact of the dual income tax system for Germany. In 2009 Germany installed the dual income tax system, keeping its progressive tax for labour income and changing its capital income to a flat taxation rate of 25%. The aim of this change from the comprehensive to the dual income tax system was diverse. First of all the German state wanted to stop the emigration of capital income to abroad countries. By implementing the 25% capital income tax Germany became more attractive to investors from foreign countries like Switzerland due to their higher taxation rate of 35%. As an additional positive effect Germany could hold its own capital income taxes in the country. If Germany would ha ve kept it this way, a major relief of administration on the governmental and in the private sector would have been seen. The taxation on capital income would have been done directly as a deduction at source by the capital organization like banks or pension organization, as a standard anonymous fee. This as consequents would have meant a higher and more continuous unquestionable income flow and a real established flat tax for the capital income tax.But this was not the case, due to a minority, the people whose income tax is below the minimum subsistence level. These people claimed that the taxation of capital income at a rate of 25 % compared to their taxation level from the comprehensive taxation system which is lower than 25 % is unfair and not feasible. This is why the German model of the dual income taxation system could not be installed in its pure way, but with a major amount of adjustments. To give people living at the minimum subsistence level a chance to be taxed by their correct tax rate the capital income tax from banks had to be change from anonymous to personalized. On the one hand this meant a huge effort for banks to change their standard fee to a personalized fee tracing every capital movement on bank accounts. And on the other hand the anticipated administration reduction was not fulfilled. Taxpayers below the minimum subsistence level still have to create a tax declaration with a special point form.The problem with one special treatment is that it never comes alone, and so it is the same in Germany. As one of the few countries left which still has got the perform tax as a fixed component of the tax system, the simple neglection as it is foreseen in the flat tax system for capital income was not possible, has to keep the perform tax specialties in mind. The church fee in Germany is even dependant the federal state you life in and can vary between 8 9 %. In the old comprehensive system it was an easy task to retain the church taxes, due to the fact that this tax was retained as one tax from the hole income. With the new dual income tax system the labour income part of the church taxation is treated in the same way, by deduction of the entrepreneur. But to keep the principle of being a fair state, of course the capital income part of the church tax hast do be discharged as well. In principle this doesnt seem to be that big of a task but as the capital income is deduced by a capital company as banks even more information exchange is necessary. An line up problem with the further information exchange is the question if a, lets stay with this example, bank should have the right or need to know ones religious orientation. As a diverse and social alert state Germany added another special treatment to the capital income taxation system. Church tax payers who have capital income then have two options. These would be on the one hand, provide your bank with you religious orientation who then would have to check each capital i ncome payment on the capital income tax 25 % the 5,5 % solidarity surcharge tax and then depending on the Information the 8 9% church taxes. Or on the other hand declare your taxes through the normal tax declaration and being charged retroactively.Especially here you can see how the gap between fair and simple is a thin line which Is hard to meet. either a taxation system is held flat and small so special tax treatments like church taxes or the regard of the Taxpayers below the minimum subsistence level are not concerned, or the system is tried to be held fair and a huge amount of administrative costs is installed.Another side effect of the dual income tax system is a well known problem that in general integrity in personal businesses should be intensified. With the flat tax for capital income in Germany unfortunately the opposite is achieved. If an business owner gives a loan to his own company, his interest incomes are taxed according to the normal progressive tax rate (up to 5 0%). Giving the money to the bank instead of his own company allows him to make use of the favour of the flat tax rate. This lead to an unforeseen out pulls of money of personal businesses and reinvesting it in the capital food market. Here again the question can be asked, which aim is the dual income taxation system avocation? If the main aim was to ensure a larger capital spend in the local market then the aim was fulfilled, but if a long term effect as supporting the amplify of equity in private businesses was targeted then a clearly miss must be admitted. anyways the change to the dual income tax system for people with income greater than the minimum subsistence level presented a agreeable relief. As the capital amount of exemption in Germany is currently at 801 euros any capital income higher than 800 euros (20000 euros at an interest rate of 4 %) and a labour income tax higher than 25 % can make a noticeable saving.The problem in the Germany state is that it always tries t o care for everybody, this is why a simplified system is hard or even impossible to install in Germany.ConclusionBecause the pecuniary functionality is not a static system there is in my opinion hardly any tax system which can last all too long. This is also the reason way a change in the German taxation system was needed badly. In my opinion the dual income tax system as it is thought of, in its original form without any special treatments is a very attractive and a realizable taxation system. With its aim to simplify the capital taxation by installing a flat tax which is deducted at the source is a major relief to administrative effort.As a critical discussion Point concerning the dual income tax system, is my question can a taxation system be seen as fair if a person who owns an X amount of Euros (which is enough for him to live from the interests) should be allowed life a nice and easy life and only having to pay a low capital income Tax. on The contrary the taxpayer working 33 0 days paying the higher labour tax rate according to a comprehensive tax system? To illustrate this a little more clearly lets make a simple example with numbers. In the one hand we have the rich person with a capital of 5 million Euros who, with a interst rate of 4 %, has got a capital gain of 200.000 Euros. As this is seen as capital income it is only taxed at a low rate of 25 % so, the rich person can keep net 150.000 . He can keep his life standard without working and overdone be on holiday the whole year. On the other Hand the person who works hard and has got a labour income of 200.000 Euros, hast to pay the top tax rate of 50% and can only use the remaining 100.000 Euros.SummaryDue to new European taxation systems many countries changed their view on taxation and had no other opportunity than to reform their own system.The dual income tax system, as a so called Scheduler Taxation System, because it has different schedules for the different income types originates from two di fferent taxation models, these are a comprehensive, and flat tax taxation methods. The Main aims of the DIT system is the separation of capital and labour income. The dual income tax system underlays a proportional tax rate on all net income (e.g. Capital, interests, dividends, business income, income from real estate) and a progressive tax rate on labour income.With this background I took a look at the previous described Tax systems.Conclusions of theA major problem of the dual income tax in Germany is the sense experience of unfairness that is implemented by the general application of this tool. This lead to possible individual tax deductions. A general capital income tax, that is collected right where it is generated from the bank and is discharged anonymously is administrated easily.An advantage of a flat tax rate is ideally a simplification of the existing system. In Germany however in vagabond to avoid unequal treatment individual tax deductions are possible. This counterstr ikes the hoped effect.Vereinfachungs effect flat tax vereinfachung. A) keine abzhge b) destination gebhren etc. wird einfacher aber immer grber (ungerecht)Aufantrag. Auch die capitalertrge.