Comparative tax systems in developing and developed 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.

Taxes and Tax Systems

Taxation systems represent governments' way of producing the money required by the administration of the state. In other words, money gathered from different taxes is used in order to sustain expenditures on war duties if there is the case, to sustain the enforcement of law and public order, for the protection of the property of individuals, companies, and the state, for developing the economic infrastructure of the country. In addition to this, the money is used for developing a series of public works and sustaining public services required by the population. Most of the money from these taxes is used for ensuring public services like the educational system, the health care system, the pensions system, unemployment benefits, ensuring public transportation, and different public utilities. Important amounts of money from these taxes are used for paying the debts of the state and the interests associated with them

In order to analyze countries' taxation systems, it is important to determine the objectives that this system must reach in the case of each country. In most cases, the most important role of the taxation system is represented by ensuring the revenues of the state. These revenues are used in order to sustain the different activities of the state. This is the most important difference between the public and the private sector.

The companies in the private sector must produce and sell their products and services to their customers in order to generate revenues. In order to reach this objective, they must compete with other companies for these revenues. The situation in the public sector is different. This is because the state cannot produce and sell products and services. Therefore, its revenues must be generated by taxation.

Another objective of tax systems is represented by redistribution. In other words, the state collects wealth from the segments within the society that can afford to pay the established taxes and direct them towards the categories that require support. In certain countries there has been discussed the opportunity of establishing taxes on wealth, on rich people and banks, in certain regions it has been titled the Robin Hood tax

. This means that rich people should be subjected to higher taxes because of their wealth. The money collected from this tax was intended to be used for supporting the poor segments of the population.

However, it seems that such a tax is unlikely to be established. There have been many disagreements on how to determine who the rich people are and what sets of criteria they must meet in order to be considered rich and worthy of this tax. Some of the specialists involved in such projects established a series of criteria that included owning yachts, highly valued real estate, bank accounts and others in order to determine who rich people are.

But their efforts were criticized by other specialists in the field that considered the Robin Hood tax quite inefficient. The critics of this tax explained their position by stating that the wealth people that would suffer from paying this tax would find ways to elude it. This can be performed by transferring their properties on other persons or companies. In addition to this, such a tax is likely to determine them to move their money from local banks to banks in Switzerland that do not provide information on their clients.

Therefore, this would make it very difficult to identify the real wealth of these people. Also, this would have other negative effects on the country in case. If these people move their money from the banks in the country to banks in other countries in order to avoid this tax, this would determine a series of fluctuations in the amount of money available on the capital market of the country in case, and would also determine fluctuations of the exchange rate of the country's currency.

This situation has a series of repercussions that are difficult to counteract. Such a situation can determine significant instability on the capital market, with important implications on the business activity in that country. This increases the risk level associated with doing business in that country, which determines investors to modify their strategy and reduce the level of their investments.

This obviously creates a series of problems for the companies in the country and for their employees. If these companies experience such problems with their activity, it is likely that their incomes will significantly reduce, leading to reduced taxes paid by these companies to the state. This means that the state collects lower amounts of money from the taxes applied to these companies. These can be the effects of imposing a Robin Hood tax.

Another purpose of taxation is represented by repricing. This can be observed in the case of externalities. In other words, the state establishes certain taxes in order to reduce and discourage negative behaviors. This is the case of taxes on tobacco that are intended to reduce smoking. Specialists in the field and other categories of individuals consider that products like tobacco, alcohol, fast foods should be applied higher taxes in order to reduce their consumption. In addition to this, they consider that the money collected from these taxes should go to the health care system, because these products affect people's health and the health care system in numerous countries requires increased levels of resources.

There is also another purpose of taxation that is representation. This refers to the state establishing taxes on the population, and the population having the right of demanding accountability from the state

. In other words, the government must report its activities connected with tax collection and its expenditures. The citizens that pay these taxes have the right of requesting such information from the state. It has been observed that direct taxes determine the highest level of accountability. This is mostly the case of income taxes. This leads to improved public management. The influence that indirect taxes have on improving public management is not as significant as that determined by direct taxes.

Another objective of taxation is represented by control. By developing a system intended to identify the different categories of taxpayers, the assets that can be taxed, and monitoring the tax collection process, the state is able to control he economic activity. This also allows the government to control production.

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.