Module Title: Taxation
Module Code: 6BUS0095
Coursework Title: Critically evaluate Amanda’s proposal
Word Count: 1002
Amanda Shimit had experienced a terrible Christmas due to the poor British transportation system caused by the heavy ice and snow. Hence, as a MP and Leader of the Junity Party, she came up with an idea to propose a new tax scheme that adds 1p per mile to all the transportation to pay for improvement. It is the aim of this essay to critically evaluate Amanda’s proposal mainly with reference to Adam Smith’s Canons of taxation, and conclude by stating whether her proposal can stand in parliament, abandon the idea entirely or make any amendments to turn it to be a better tax proposal.
Adam Smith’s canons of taxation describe the principles of a good, fair and efficient tax system, which mainly includes four complements or principles: equity, certainty, convenience and efficiency (Oats and Lymer, 2010). First of all, equity is defined that tax payments must be proportional to income (Smith, n.d.). This principle can be further divided into two categories: horizontal equity and vertical equity (Oats and Lymer, 2010). The former leg refers to the arrangement of tax liabilities among those with similar capacity. For instance, both employed and self employed citizens need to pay income tax. The latter leg, on the other hand, legitimizes the tax liabilities among those with different capacity. In other words, people have higher income should pay more thx than those earn less (Biz/ed, 2011). Based on this stance, Amanda’s proposal is obviously not perfect since it goes against the requirement of vertical equity. She asked that everyone, no matter his or her income level, should pay 1p per mile to all the transportation systems. This will put more pressure on people who have low income or work in a remote place, unless there are other related subsidies available for them.
Secondly, a tax system must be clear and certain. On one hand, tax rules must be well understood by tax-payers. It is difficult to conceive of a tax system that is regarded as certain if the rules are so oblique and complex that only a small group of specialists are able to understand them (Tutor2u, 2011; Parliament, 2011). On the other hand, tax rates should be relatively stable from year to year and should not be subject to sudden fluctuations. This allows people to start their financial planning early and know exactly the amount of tax liabilities they will face in the coming year (ibid). The tax proposal proposed by Amanda seems rather reasonable based on the extremely terrible weather in Britain this year. However, there are only limited possibilities that this kind of weather is likely to happen frequently and it is hard to estimate whether or not it will happen in the next year. Hence, it does not meet the criterion of certainty and unlikely to stand in parliament. Furthermore, Oats and Lymer (2010) also point out that there is a difference between the formal incidence and the effective incidence. For example, the formal incidence of the value added tax (VAT) is the suppliers or retailers while those who actually bear the tax are consumers. In our scenario, Amanda does not clarify the person who really bears the tax: private car owners or transportation companies.
The third principle of a good tax system, according to Adam Smith, is convenience. In other words, the process of collecting taxes should be made as painless as possible, and collected at a time and in a manner that is convenient for tax-payers (Oats and Lymer, 2010). Amanda’s proposal collects tax based on the miles of transportation, which adds 1p per mile for all the transportation cost. In my opinion, this is a relatively convenient way of collecting taxes since the car or bus can automatically record the mileage by themselves. Consequently, government officers from tax department can easily access to the data by just checking the mileage. However, there may be some small problems occurred as some drivers are likely to cheat on their mileage, and it is difficult to monitor or prevent. In addition, the compliance cost should be taken into consideration as well since the cost of checking every mileage can be pretty high. Again, the question that who should bear this cost is controversial.
Finally, efficient taxes raise revenue without negative distortions such as reducing work incentives for certain individuals and investment incentives for certain companies (Tutor2u, 2011). However in reality, sometimes the systems do influence our choices. For instance, the high taxes on tobaccos and alcohols to some extent reduce the willingness of customers to purchase. In this situation, if Amanda’s proposal is proved, it is estimated that people will use public transportation more often and drive less frequently, which is actually good for the environment. Besides, it helps reduce the problems of traffic jam and energy shortage. Consequently, from this point of view, the tax proposal should be approved.
In conclusion, this essay has critically analyzed Amanda’s tax proposal on the basis of the four disciplines coined by Adam Smith. We argue that this proposal is far from perfect because it lacks vertical equity and is unstable or certain enough. Additionally, it is difficult to differentiate between the formal incidence and effective incidence, as well as to monitor mileage. Finally, it may result in some negative distortions. Nevertheless, it still has a few positive impacts. Hence, it is highly recommend that Amanda make some amendments so that it can stand in parliament. For instance, she should state clearly that the tax payable is positive related to the level or frequency of transportation usage. In addition, ideas of proper monitor system should also be included in this proposal so that the mileage can be easily measured. Finally, the person who really bears the tax should be explicitly defined: For private cars, it is the owner paying the tax; for public transportations such as buses or trains, it is the responsibilities of these companies to pay for the tax, which can be compensated by raising the price of tickets to a same extent.
Biz/ed (2011). Income Tax Theories – Progressive or Regressive – Who pays what? (online). Available at: <http://www.bized.co.uk/virtual/economy/policy/tools/income/inctaxth2.htm> [21 February 2011]
Oats, L. and Lymer. A. (2010) Taxation: Policy & Practice (17th Ed.). United Kingdom: Fiscal Publications.
Parliament (2011). The principles of tax policy (online). Available at: <http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/taxpolicy/m17.htm> [22 February 2011]
Smith, S. (n.d.). Introduction to key concepts in the economics of taxation (online). Available at: <http://www.ucl.ac.uk/~uctpa15/Econ7008_slides1.pdf> [21 February 2011]
Tutor2u (2011). Principles of a good tax system (online). Available at: < http://tutor2u.net/economics/content/topics/fiscalpolicy/tax_principles.htm> [21 February 2011]