Taxes are exactions on income, property, services, sales, value added, labor, luxuries, or on any form of wealth. There are two main reasons for levying a tax: to raise revenue or to regulate the uses of goods or services, or to suppress behavior authorities have deemed to be socially unacceptable.
Revenue taxes are raised to support the many functions and services of government. These include defense, policing, fire, flood, health, and other forms of protection, including maintaining prisons. In addition, revenue funds may be used to support the general cost of government, to supply education, mental health services, and general health services, or for other needs of the country’s people. Regulatory taxes appear similar to revenue taxes, but the goal of these taxes is not to gain revenue, but to control. They are imposed to regulate products or behavior that government policy seeks to eliminate or control.
While the revenue from a regulatory tax may be a lucrative source of income for a government, regulatory taxes exist to penalize or even prevent the sale of a product, or to prevent socially undesirable behavior. Alcohol and tobacco, if not banned outright, have often been heavily taxed to reduce consumption. Part of the regulatory scheme could involve, for example, forcing companies producing alcohol to pay a regulatory tax in the form of a license fee.
Narcotics are tightly regulated drugs. In the 19th century, attempts by the Chinese to regulate the opium trade evoked the Opium Wars. In the 20th century, taxes have been used to regulate a range of narcotics and other drugs, such as marijuana. These regulatory taxes were later expanded to control organized crime. The taxing of the manufacturing and distribution of firearms and other weapons, such as machine guns, was enacted in part to control organized crime. Governments have sought to control drugs and gambling through taxes on a license to administer drugs or on those engaged in the gambling profession.
Regulatory taxes can also be used to protect producers. For example, tariffs were used extensively by the United States in the 19th century to protect American manufacturing from cheaper foreign goods. The protective tariffs made the cost of domestic goods seem cheaper because of the tariffs levied on imported goods.
Favored domestic corporations can be the beneficiary of regulatory taxes. Oleomargarine was taxed in the early decades of its use to protect the dairy industry. The tax was imposed because dairy farmers voted in greater numbers than did the oleomargarine manufacturers. Congress and the states have taxed futures in grain commodities and cotton at the behest of agricultural groups.
Regulatory taxes have been designed to protect public health. Congress sought to protect the health of children with a prohibitive tax on child labor. It also imposed a regulatory tax in the early 1900s to protect industrial workers making phosphorus-tipped matches from developing a degenerative disease (“phossy jaw”) caused by prolonged exposure to phosphorus. Heavy taxes on smokestacks (effluent tax) seek to regulate air quality conditions.
In recent years numerous proposals have been floated that, if adopted, would tax the carbon dioxide emissions of business, manufacturing facilities, and other business activities. A tax on carbon dioxide emissions, if adopted, would be a regulatory tax. If allowed, even home fireplaces could be taxed. The justification for this form of taxation is the belief that global warming is occurring and that it is anthropogenic. Carbon dioxide is a natural gas that is breathed in by plants to make chlorophyll. After making chlorophyll, they breathe out oxygen. The issue over carbon dioxide and greenhouse gases is centered on the level of carbon dioxide in the atmosphere. Carbon dioxide is a natural greenhouse gas that aids the earth by retaining some of the energy radiated into space by the surface of the earth. The tax is being justified by hailing the need to reduce global warming caused by an excess of carbon dioxide. The excess is alleged to be due mainly to the burning of fossil fuels. If adopted, a global tax on carbon dioxide emissions would require a global enforcement mechanism.
Many observers have concluded that the ensuing tax burden would be enormous. It also has the potential for establishing a global rule of law that may be more rule than law. Some observers believe that a global carbon dioxide tax is less a way to care for the environment than it is a way to penalize productive corporations in a global scheme to transfer wealth from industrial countries to poorer, less well-developed countries.
Taxation And Government
Governments have imposed taxes since the recorded beginnings of civilizations. Modern governments have developed a catalog of taxes to gain revenues for their functions and for regulatory purposes. The variety of taxes developed historically and in modern times demonstrates the existence of very inventive minds. However, schemes for taxation often run afoul of the consequences of taxation.
The common approach of many governments has been to tax and spend with only occasional regard for the consequences. However, the development of economically sound tax policies requires the careful scripting of tax laws, otherwise taxation may do harm to businesses and to the people who work for them.
Taxes may be either direct or indirect. Direct taxes are levied directly on income or labor as a pecuniary burden. Indirect taxes such as sales taxes, gasoline taxes, value added tax (VAT), or goods and services tax (GST) are indirect taxes. They can be passed along to others from the producer, the supplier, or the seller to the one with the final economic responsibility. This usually ends up being paid by consumers. Many act as consumption taxes.
The globalization of industry, the urbanization of the world, along with the huge increases in agricultural production and the great expansion of global trading since 1945, have given government ever greater opportunities to tax businesses. Tax policies are the result of a variety of forces. These may be the demands of business for protection, infrastructure, and services. Other forces may demand that governments supply a variety of services, such as water, sanitation, utilities, policing, education, recreation, cultural supports, heath care, retirement benefits, and national defense. All of these services require income that has to come from somewhere. Unless a government is to engage in a program of looting from conquests, which in the modern world would be very risky, it has to pay for these needs and demands with taxes.
Taxes experienced in the developed world are usually corporate income taxes, payroll taxes, property taxes, and other types of taxes, some of which are hidden in the costs of goods and services. The most visible corporate taxes are those on corporate incomes. These taxes are usually levied on the profits of a corporation after its costs for labor, materials, losses, depreciation of capital, and even some types of taxes have been deducted. This type of tax is used globally by most countries; however, the tax basis often varies. For instance, in some countries, depreciation of capital is not an allowable business deduction.
Investors, whether corporate or individual, are often faced with taxes on rental income derived from rental properties in foreign countries. In some cases, there is little tax relief from the cost of maintaining or improving the property. These kinds of taxes have encouraged some people to move to a foreign country, with little intention of ever returning to their home country.
A long-standing complaint against corporate taxes is that they hurt investors, workers, and consumers. In the case of investors, they are often taxed on the dividends they receive from the profits made by the corporation. Many people in Europe and elsewhere, schooled in socialist ideologies, believe that profits should be taxed to be used for social purposes, or for the authoritative reallocation by the government. The tax in this case expresses a distrust of capitalism that may be found among workers; however, the consequences for workers in a high-tax state can be quite negative.
For example, Sweden is a high-tax state with many social welfare programs that use revenues from the state’s redistribution system. However, observers have noted that the price of goods in stores is very high. Moreover, the incentive to engage in extra work to gain an increased income is suppressed by the tax burden rendering it an exercise in futility, when most of the extra income will be taxed away.
In Great Britain, high corporate taxes have also had a negative effect. Not only is there a high corporate tax, but corporations with earnings abroad are forced to pay taxes on overseas income that has been taxed at a lower rate, as well as having to pay taxes on domestic profits. The fact that such policies can make business prohibitive is usually lost on such ideologues. The consequence is that businesses in Europe, including England, are moving from hightax countries to other countries where taxes are much lower.
In contrast to England and to India (another hightax country), South Korea has had a booming economy that has slowed in recent years. To stimulate it, the government is moving to cut taxes in South Korea by billions of dollars per year. The move is one used to shift income from the government to private individuals, where the use of the money would likely stimulate new business, investments, and consumption.
In even greater contrast are some of the dynamic business centers developing in the Third World, where taxes are either low or nonexistent. The United Arab Emirates and other tax-free zones have boomed in recent decades. The revenues from investments yielded huge incomes and negated the need for taxes. Usually, such places have special circumstances that encourage this form of activity, but the key is that taxes have not prevented development, including the general welfare of the people.
For people working overseas for either a company that is the same as their nationality or that is a foreign company, from the perspective of their citizenship, the issue of income taxes is significant. Income earned in a foreign country is often not taxed by the home country until it reaches a level that is a good deal higher than it would be if the worker had remained in his or her homeland. The tax advantages can be significant, because it allows expatriate workers to earn higher salaries, accumulate savings, and to gain valuable foreign experiences. Unless the expatriate employee is in a tax-free zone, such as Dubai, it may well be that the taxes owed to the foreign government where he or she is a resident are high, and that taxes are also owed to their home country. Oddly, those who propose global tax schemes do not propose uniform global tax rates. Such a move would reduce national sovereignty, but would stimulate business globally.
Governments faced with budget deficits created by generous social entitlements have found that they can do little to lower taxes, even if their tax base withers as companies emigrate. Ultimately, on a nationalist basis, tax policies have to be competitive or businesses will relocate. Most of the high income and corporate tax rates are found in the developed world of Europe, North America, Japan, and Australia. In recent years, emigration of businesses seeking a tax haven has been a phenomenon observed in Great Britain and elsewhere.
American Corporate Taxation
American corporations face taxation from both the federal and state governments. The combined rates make corporate taxation in the United States the highest or nearly the highest in the world. The pressure from stockholders to produce higher profits can lead to businesses leaving for more tax-friendly countries or reorganizing to avoid treatment as a domestic business, because tax treatment for a foreign business can be more favorable.
A significant tax issue faced by American foreign subsidiaries is the double-taxation policy of the United States. It taxes domestic corporate earnings at a rate of 35 percent, and then also taxes the earnings of American subsidiaries in foreign countries at the same rate. However, to prevent the tax rate from being effectively a full combination of the tax rate of the foreign country and the U.S. rate, a tax credit is allowed, which reduces the taxes owed so that the American subsidiary pays a rate that is the difference between the U.S. 35 percent and the tax rate of the foreign country in which it is doing business. However, a U.S. corporation may invest in its operations in the foreign country in which it is doing business and be allowed to “defer” its tax obligations.
Capital gains taxes are also a burden for investors and often for corporations as well. The tax is levied on the profit made when a capital asset is sold. The treatment of capital gains is often as if it were ordinary income when it is not. Inflation can also make profits from the sale of assets at an inflated price seem as if there has been a significant gain, when in actuality there has not been, because of the change in money values and the increase in the taxes taken for the higher “profit” from the sale. For companies that have international operations, this can cause significant tax issues.
A variety of plans have been proposed in recent times that seek to grant the United Nations (UN) the power to tax. Currently, the UN is a confederation in which the member states have retained sovereignty. As a consequence, the UN lacks the authority to levy taxes on either its member states or upon their businesses or people. However, a plan has been unveiled to allow the United Nations Development Programme (UNDP) to tax currency exchanges. The tax plan was proposed at the World Economic Forum in Davos, Switzerland. The plan is called the “Tobin Tax,” after Professor James Tobin of Yale University. The tax would be levied on worldwide currency exchanges. It is estimated that the Tobin Tax would gain $3 trillion in funds that could be used by the UN to eliminate poverty in the Third World. Another source of global taxation would be fines on countries that are judged to be polluting.
Other global taxes have been proposed to support poverty programs, to educate children without schooling in poor countries, to prevent the spread of human immunodeficiency virus (HIV)/acquired immunodeficiency syndrome (AIDS), malaria, and for other noble causes. These proposals have met with fierce opposition in the United States. Assurances that there will be close exercise of democratic oversight by agencies of the UN have not been persuasive. This is especially the case when the tax schemes are tied to ideological perspectives that deny that prosperity in the Western world is not because of hard work, legal protection for property rights, and an excellent market system, and instead claim that global poverty is because of the exploitation of the industrialized world. A recent proposal calls for taxing airline tickets as a global tax to fund Third World poverty programs.
- Jonas Agell and Peter Birch Sorensen, eds., Tax Policy and Labor Market Performance (MIT Press, 2006);
- Luigi Bernardi and Paola Profeta, eds., Tax Systems and Tax Reforms in Europe (Taylor & Francis, 2003);
- Luigi Bernardi et al., eds., Tax Systems and Tax Reforms in South and East Asia (Taylor & Francis, 2006);
- Richard M. Bird and N. E. Slack, eds., International Handbook of Land and Property Taxation (Edward Elgar, 2004);
- Kent P. Kimbrough, “Optimal Taxes and Tarriffs with Private Information,” Open Economies Review (v.19/4, 2008);
- David McKenzie and Yaye Seynabou Sakho, Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability (World Bank, 2008);
- Organisation for Economic Cooperation and Development, The Convention on Mutual Administrative Assistance in Tax Matters: Twentieth Anniversary Edition (Organisation for Economic Co-operation and Development, 2008);
- Alan Schek and Oliver Oldman, Value Added Tax: A Comparative Approach (Cambridge University Press, 2006);
- Myron S. Scholes, Taxes & Business Strategy (Pearson Prentice Hall, 2009);
- Zmarak Shalizi and Lyn Squire, Tax Policy in Sub-Saharan Africa: A Framework for Analysis (World Bank Publications, 1996).
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