tax matters

Chapter 6 Tax matters

1、 Why have tax?

The Collins Concise English Dictionary (1992. P 1383) defines the word “tax” as: “a compulsory financial contribution imposed by a government to raise revenue, levied on income or property, on the prices of goods and services, etc. and to levy a tax on (persons, companies, etc.)” (Clinton Alley, 2008). there are several reasons can explain the existence of tax:
The main function of taxation is the fiscal one. It is through fiscality that taxes play their role in the formation of the country budget necessary for the realization of national programs.
The function of regeneration. By taxing the utilization of natural resources, roads, mineral and primary resources, the country uses these proceeds in order to regenerate the exploited resources, for example, nearly all of the New Zealand Government tax revenue is used to fund government expenditure, education, health care, and social welfare.
Redistribution of wealth or income, which can narrow the gap between the rich and the poor.
The use of tax can help a country obtain its economic targets, and can be used as a way to adjust inflation and deflation. Ultimately, it provides for the assurance of the social stability.
Providing funds to support public services.
Through taxation, a country can control its financial-economic activity of juridical and natural person, as well as control the income source and spending direction.
Tax is part of the earnings or profits, to some extent, levy tax from the poor people and organization may aggravate their plight.
To sum up, tax brings more benefits to the country, organizations and society.

2、 What are the benefits of having a balance between direct and indirect tax?

The tax system can be divided into two categories: direct tax and indirect tax. A direct tax is a tax that is intended to bear it, such as income tax and individual tax. In contrast, an indirect tax is a tax that is levied on one group with the intention that it be passed on to another group, the most common indirect tax is goods and services tax (GST) (James, 1998, p 42). The two kinds of tax vary from country to country and play a different role in a country’s development, particularly, in developing countries and so does the relation between the two kinds of taxes. In America and Japan, the part of indirect tax is very low. Contrarily, the in direct tax in Mexico, turkey and Iceland almost occupy half of their national income.

Indirect tax brings convenience to both the tax payers and country. For the tax payers, they do not feel the burden of indirect tax, because the tax is imposed partly and significantly invisible, which can change the consumption behavior of consumer. Direct tax is an effective way, which can used to redistribute the income between the poor and the wealthy.

It is very hard to say which form of tax is preferable. The country in the world favors a balance of the two tax form to establish an efficient tax system. Considering the efficiency and justice, the relation of direct and indirect tax has to be balanced. And through the last fifteen years, we can see that a balancing indirect and direct tax can make trade both more efficient and more secure.

3、 Discuss, using example, the differences between tax evasion, tax avoidance and tax mitigation.

Tax evasion is an illegal and unfair practice where a person, organization or corporation intentionally avoids paying their true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. For example, one company should be imposed more tax if the company gain more profit. Actually, the company breached the law and put the false accounting information into its financial statements to reduce the high tax fees. And then we can say the behavior of the company belongs to tax evasion or tax fraud.

Tax avoidance is legal and unfair, which use legal methods to modify an individual's financial situation in order to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion, which is illegal. For instance, Jim earned $20000 after finish a program, if the company pays all Jim’s wage to him at once, Jim will pay more income tax fees to the government. On the other hand, if the company pay Jim’s wage by ten months installment, it means Jim can get $2000 per mouth. By this way, Jim will pay less tax fees, because he gets wage in installment with smaller amount of money.

Tax mitigation is legal and fair, people or organizations can use acceptable methods to arrange their financial affairs to reduce tax responsibility and liability. Anyone attempting to minimize their taxes must do so in a way that has been endorsed by Parliament. It refers to transactions undertaken for economic purposes that have the incidental result of reducing the incidence of tax.

Reference

Lawrence, S., Davey, H., & Low, M. (2012). Accounting at work in business, government and society Pearson Education New Zealand.

G., C. A. R. (2008). New Zealand taxation. Wellington, New Zealand: Thomson Brookers.

Nightingale, K. (2002). Taxation: theory and practice: Financial Times/Prentice Hall.

Greenheld, J. (1998). The tax environment in New Zealand. In K. Hooper, et al., (Eds.), Tax policy & principles: A New Zealand perspective. Wellington, NZ: Brookers. Ch4, pp. 79-96.