National culture and taxation systems in Central European countries

¶ … tax system of one country with that of another is an exercise fraught with dificulties and ultimately doomed to failure . tax system will never be much more than a reflection of strongly national cultures and forces. discuss this statement in the light of your knowledge of comparative tax system in developing and/or developed countries i

Tax Systems

The following pages focus on analyzing the factors of influence on different countries' taxation systems. The paper begins with an introductory section that allows readers understand the point-of-view used in this paper. The following section refers to describing the taxes pand taxation systems used by most countries and their objectives, in order to understand the similarities and differences between these taxation systems. The paper continues with the analysis of several factors that influence countries' tax system design, like cultural factors, technological developments, and natural resources. In order to exemplify this, the taxation systems of the Czech Republic, Slovakia, and Estonia are presented. The Future of Taxation section addresses some of the most important issues that are likely to affect countries' convergence towards a unified taxation system.

Introduction

Taxes are a subject that usually makes people frown when brought into discussion. People's opinions regarding taxes vary in accordance with their relationship with these taxes. Individual taxpayers consider that the number and level of these taxes are too high and they do not take into consideration the financial situation of taxpayers. But it is little that these taxpayers can do in order to change the situation. This is because in case they do not pay their taxes, significant penalties are added to their value.

Companies and other economic agents are in a similar situation. The tax level is very high, and many companies prefer to engage in evasion practices and to find other possibilities that allow them to escape tax laws. In addition to this, their production costs vary from country to country because of the different taxes associated with their employees. In numerous situations this leads to these companies not being able to pay their taxes because their incomes are not sufficient. They are forced to file for bankruptcy or to sell the business because it is not profitable for them to pay so many taxes and to benefit from so little profits.

The government in these countries is forced to create incomes to the state budget also be establishing a series of taxes. Therefore, governments must find a balance between the state's needs and the possibilities of taxpayers. These governments must also determine a tax level that supports the activity of the state, but ensures the development of companies' activity.

The general meaning of taxation refers to individuals' or organizations' obligations to be charged in exchange of developing certain activities on a state's territory. This includes activities like working for a salary, owning properties, developing businesses, selling products and services, buying them, making use of the country's national resources, and others. The most important objective of taxes is represented by collecting the revenues required for the state's functioning. Another objective refers to the redistribution of these revenues, from wealthier categories to categories that need financial support. Other objectives of taxation are represented by repricing, representation, and control.

Countries have different tax systems. The differences between these tax systems are determined by these countries' national cultures and forces. Therefore, it is not efficient to compare the tax system in a country to the tax system in another country with a different culture and economic situation. These differences are presented in the paper by describing the taxation systems in the U.S., UK, Germany, the Czech Republic, Slovakia, Estonia, India, China, and Nigeria. Their tax systems are designed based on each country's specific characteristics. China is trying to develop an international orientation, revealed by its tax structure. Nigeria is rich in petroleum, is one of the most important oil producers, and the government has imposed a tax on petroleum that is the property of the state. Therefore, it is not recommended that countries develop common principles in the case of their taxation systems, because their needs and conditions differ.

Tax System Design Principles

Countries have different issues to consider when developing their tax systems. However, the design of these taxation systems must rely on certain principles to be applied during the development and implementation of the system. The common issue regarding the design of these systems refers to anticipating the behavioral responses of taxpayers to these systems. There are several models used in order to determine these behavioral responses. Specialists in economics use a series of computing and assumptions on the elasticity of supply and demand curves. Based on their findings, regulators determine what type of taxes and at what level can be applied in the case of each taxpayer category.

Specialists in other fields prefer to anticipate behavioral response by taking into consideration the direct motivations of taxpayers. In other words, they are trying to determine what taxpayers want and need from the taxation system and how it can be designed in order to satisfy both the interests of the state and of taxpayers. Their efforts are intended to identify these needs in order to be able to structure a taxation system that help reduce avoidance behaviors from taxpayers, which causes economic distortion and reduced incomes of the state

. Therefore, these specialists have identified the following principles for designing efficient taxation systems:

a) Principle of relative indifference

b) Principle of taxing the maximand

c) Principle of taxing the reported maximand

d) Principle of classification by maximand

Factors of Influence on Tax Structure

Countries' tax structure depends on s series of factors. The most important factors that influence the design of the tax structure and development and implementation of the tax policy are represented by: the economic situation of the country, the financial needs of the state, the political environment, the culture of the country, the demographic environment, the technology level within the country, and others. These factors are at different levels in each country, which makes it difficult to develop a converged taxation system.

The table bellow reveals the evolution of the tax structure in the OECD area:

Tax Structure in the OECD Area

1965

1975

1985

1995

2005

2009

Personal income tax

26

30

30

26

24

25

Corporate income tax

9

8

8

8

10

8

Social security contributions 2

18

22

22

25

25

27

(employee)

( 6)

( 7)

( 7)

( 9)

( 9)

( 9)

(employer)

( 10)

( 14)

( 13)

( 14)

( 14)

( 15)

Payroll taxes

1

1

1

1

1

1

Property taxes

8

6

5

5

6

5

General consumption taxes

12

13

16

19

20

20

Specific consumption taxes

24

18

16

13

11

11

Other taxes 3

2

2

2

3

3

3

Total

1. Percentage share of major tax categories in total tax revenue.

2. Including social security contributions paid by the self-employed and benefit recipients (heading 2300) that are not shown in the breakdown over employees and employers.

3. Including certain taxes on goods and services (heading 5200) and stamp taxes.

Source: www. oecd.com

Cultural Factors and the Tax Structure

The cultural factor s one of the most important issues that affect the design of different countries' taxation system. This is also one f the most important reasons that prevent countries from converging to a common tax policy. The difference between countries on taxation level can be observed by analyzing the different cultures of Asian and Western countries. In Asian civilizations, like China or Japan, the fiscal strategy is of social orientation. In other words, these states orient towards social protection rather than economic development. This is also the case of countries with excessive bureaucracy and with an increased number of state institutions. In such countries with increased state control on the economy, the taxation structure tends to be oriented towards collecting money that is mostly used for social security aspects.

The situation is quite different in Western countries. Germany, France, and the U.S. And other Western civilizations focus on economic development through the support provided to private companies. In these cases, these countries tend to favor small and medium enterprises by reducing the tax burden associated with their activity and income. Therefore, in order for the state to properly function, these governments must collect their money from taxes applied mostly to large multinationals. This is an important trend in international fiscal policies.

Countries in the same region can be characterized by different taxation systems. If certain countries are neighbors, this does not mean that they have similar views on taxation. This is the case of the Czech Republic, Slovakia, Estonia, and Latvia.

Czech Republic taxation system

Direct taxes:

Income taxes on individuals

Income taxes on legal entities

Capital levies - property tax like land and buildings

Capital levies -- road tax

Other taxes:

Legacy duty

Gift tax

Estate tax

Indirect taxes:

Consumer taxes on petroleum, alcohol, tobacco, duty

Other taxes are represented by:

Municipal taxes

Social insurance

In the case of the Czech Republic the Value Added Tax was harmonized to the requirements of the E.U. directives.

Therefore, the VAT in the Czech Republic reaches 20% basic rate, and 10% reduced rate.

Slovakia taxation system

The tax structure in Slovakia includes the following types of taxes:

Personal income tax

Corporate income tax

Value added tax

Excise tax

Property tax

Vehicles tax

Local taxes

Administrative fees

The VAT is of the same value of that in the Czech Republic.

Estonia taxation system

State taxes are represented by:

income tax social tax land tax gambling tax value added tax customs duty excise duties on petroleum, alcohol, tobacco heavy goods vehicle tax social security contributions

Local taxes are represented by:

sales tax boat tax advertisement tax animal tax entertainment tax parking charges

As it can be observed, these countries have certain similarities in their views on taxation, but their culture and conditions within the country determine them to differently approach the situation. These differences mostly refer to the local and state taxes. However, there are also certain similarities between their taxation systems. The similarities are represented by their approach on the value added tax.

Indian taxation system

India has a very complex taxation system that has been continuously modified during a period of 15 years in order to improve compliance, enforcement, and to facilitate the payment of taxes. The tax system in this country is based on taxes established and collected by the central government, by state governments, and by different local institutions. The central government establishes taxes like banking cash transaction, capital gains tax, corporate income, fringe benefit, personal income, securities transactions, customs duty, excise duty, and service tax. The taxes established by state governments are represented by dividend, endowment, estate, gift, flat rate, fuel, transfer, payroll, poll, social security, value added tax, and others. However, there are also certain tax incentives, like allowance for accelerated depreciation, corporate profit, and certain expense deductions.

Chinese taxation system

The Chinese government admits that taxes play an important role in the country's macro economic regulation and that they significantly influence the economic and social development of the country. In order to improve the impact of taxation, the Chinese government has developed a tax reform process intended to design a tax system oriented towards the socialist market economy. This system is based on the following categories of taxes: turnover taxes (VAT, excise, business tax, and customs duty), income taxes (enterprise income tax, individual income tax), resource taxes (urban and township land use tax), property taxes (house property, urban real estate tax), taxes for special purposes (city maintenance and construction, fixed assets investment orientation tax), behavioral taxes, and agricultural taxes.

Nigerian taxation system

The Nigerian taxation system relies on the personal income tax. The interesting fact about this tax is that it applies to groups rather than to individuals. In other words, this tax addresses communities and families. However, this is not very often practiced. The companies income tax is another important tax established by the Nigerian state. The country has a developing economy, which means that the state must support small companies. In order to reach this objective, the government has established the industrial development tax. The money collected with the help of this task is used for supporting pioneer companies. Nigeria is one of the most important oil producers, and most of its revenues are generated by this activity. Therefore, the country's government has established the petroleum profits tax.

UK taxation system

The UK taxation system focuses on income taxes, same as every taxation system of developed countries. Income taxes are applied to salaries of workers, profits of companies, state pensions, different allowances and benefits. There are also income taxes on savings and investments, like on bank and building society interest, dividends from shares, tax on rental income. The taxes on different types of transaction include the capital gains tax, and stamp duty. Taxes on goods and services are represented by value added tax, fuel duty on petroleum, excise duty on alcohol and tobacco, general betting duty. There is also a Council tax for public services.

U.S. taxation system

The U.S. has a very complex tax structure. The tax system is based on tax progressivity. The federal taxes imposed by the U.S. are represented by taxes on income, social insurance, corporate, estate, and excise taxes. The state taxes in the U.S. are represented by sales, property, income, corporate, excise tax, and others.

German taxation system

The taxation system in Germany is also very complex, based on the principle of progressivity. The complexity of this system is reflected by the fact that German taxpayers need specialized personnel to help them with their taxes. The business or corporate tax in Germany is important, but not very high. In addition to this tax, companies must also pay the income tax. Individual taxpayers also pay an income tax.

The revenues collected from these taxes are used in social welfare, paying the country's debts, maintenance of defense, salaries and pensions, and others.

Technology and Taxation

Technology is another important factor that influences countries' taxation design. There are significant differences between the taxation in developed countries and that in developing countries as a result of technological developments. The importance of technology has been mostly observed in the private sector, but its influence is beginning to be acknowledged in the public sector also. The limited resources that companies, individuals and governments must use in order to develop their activity and reach their objectives have determined numerous innovations to take place in all sectors of activity. Taxation makes no exception. Innovation leads to improved performance and increased incomes.

The development and use of technology in the public sector is mostly directed towards reducing expenditures. Technology allows governments to organize their activity in order to require a reduced number of personnel, while increasing the speed on work and employees' efficiency. This also determines an improved relationship with the taxpayer.

In developing countries that do not benefit from technological advancements as much as developed countries there can be observed an increased level of bureaucracy. This significantly reduced the efficiency and performance of the state's institutions. In addition to this, it leads to increased expenditures. This further determines larger revenue requirements from the state. In order to ensure this revenue necessary, governments are forced to increase the number of taxes. They usually focus on direct taxes rather than on indirect taxes. This is because direct taxes are easier to collect and to control in comparison with indirect taxes that taxpayers can find easier ways to elude, leading to reduced level of collection. It has also been observed that such countries are characterized by increased levels of corruption and lower collection from taxes.

National Resources and Taxation

Countries' resources play a very important role in developing their fiscal policy. These resources are represented by workforce, national resources like land and relief, and capital resources. The workforce of these countries can determine whether companies require support from the state in order to develop their activity. Countries with reduced number of workers must import the necessary workforce from developing countries. This significantly increases the financial efforts made by companies in these countries with their employees. Therefore, the governments in these countries are forced to reduce the direct taxes associated with the salaries of these workers in order to allow the company to pay these taxes while developing a profitable activity. The natural resources of these countries are also very important. The abundance or lack of these resources increases or reduces the prices of materials, which increases the costs of production and the prices of products and services. This can influence the level of profits of companies doing business in these countries, which also affects the level of taxes collected by the government.

The Future of Taxation

It is expected that developed countries should intensify their efforts towards developing a common tax policy. However, this remains an objective rather than an actual fact. This is because the differences between countries cannot be overlooked, even if we refer to developed countries. The economic and financial crisis is an important factor that influences the future of taxation and the common strategy in this direction. In other words, it is likely that countries will focus on their economic recovery and will not alter their efforts by significantly modifying their taxation policy.

It is expected that the process of developing a common taxation policy will be a very long one and with very small chances of success. As mentioned in the examples of the Czech Republic, Slovakia, and Estonia, there are significant differences between neighboring countries. This makes it very difficult to adhere to a common tax policy. The most important factors that are likely to oppose to these efforts are represented by the significant difference in countries' cultures, technological development level, national resources, and others. In addition to this, the different needs that countries have determine them to approach different views on taxation, on tax levels that must be applied. Therefore, it is recommended that countries focus on developing similar levels of taxes in case their benefit from similar economic conditions.

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Pasekova, M. et al. (2011). Comparative Analysis of Tax Systems: Some Evidence from CEE Countries. World Academy of Science, Engineering, and Technology. Retrieved February 27, 2012.