Herve public service and enhance regional development, governments

    Herve Usengumuremyi11429739  Income and Wealth TaxThroughout history, taxationsystems have been a crucial element used to promote economic growth anddevelopment as well as ensure sustainability of the commercial sector.

Furthermore, failed taxation systems have led to major economic setbacks, suchas inflation, low industrial growth rates, and economic stagnation. In thisregard, taxation systems are sensitive tools in an economy which can either leadto its prosperity or collapse (Piketty, 2015). Notably, taxation is a wide anddiverse system, which addresses all economic sectors in a country, monarchy,kingdom, or a trade union. One of the main influential sections of a taxationsystem is the income and wealth tax because it addresses matters concerningsocial welfare and personal development.

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From an economic perspective, wealth taxcommonly referred to as capital or equity tax can be described as the totallevy on the value of personal assets. Some of the commonly levied personalassets include real estate, bank deposits, and assets in insurance, ownershipof unincorporated businesses, personal trusts, pension plans, and financialsecurities. On the contrary, income tax is defined as the total levy on thefinancial income generated by all entities within their jurisdiction.

The lawrequires every enterprise as well as individuals to file their tax returnsevery financial year to determine whether they owe any taxes to the state orthey are eligible for a tax refund. Given that taxation is the mainrevenue collection approach that is used by governments to fund differentprojects, such as public service and enhance regional development, governmentsshould develop realistic and tractable tax bills, which will lead tosocially-optimal capital taxation. However, in the last two decades, thetractability of the taxation systems, especially in European Countries and theUnited States, taxation of wealth and income has been undermined by variousobjectives. Through literature review, this paper analyzes the constraints facedby current taxation systems as well as their implications for the society andthe economy. From this analysis, conclusions and recommendations to improve andstabilize taxation systems will be offered (Chakrabarti, Chakraborti,Chakravarty, & Chatterjee, 2013).

Notably, the objective of this paper isto evaluate and analyze the policy uncertainties involved in wealth and incometax bills and use economics principles to develop lasting solutions bydeveloping a tractable and realistic taxation model.  Characteristics of Income and Wealth Tax Income tax is mostly preferred bymany individuals and business because it offers a series of deductionsincluding the mortgage interest, healthcare bills, education expenses, as wellas other welfare deductions such as insurance cover. There are severalcategories of income taxes including the business, state and local, andproperty and sales income tax. The business income tax is levied on theenterprises’ economic earnings and is deducted from the firm’s calculatedprofits. The state and local income tax are levied on the individual incomestatement or in other words the monthly salary. On the other hand, the propertyand sales tax is levied on assets and properties based on the auditor’s reportsor the assessed values.

Wealth tax is the money levied onthe wealth possessed on individuals in a given country. According to the wealthtaxation model, the tax is imposed on the person’s net worth, which isaccumulated on the net values of assets after deducting the liabilities owed(Stiglitz, 2015). However, in the recent years, most countries, especially inEurope and North America, have abolished the wealth tax and turned theirinterest on the income tax. For instance, the United States does not chargewealth tax but requires its citizens as well as local enterprises to fileincome and property taxes. Although the wealth income is seen as unjust meansof taxation, it is the best model of enhancing equitable redistribution ofresources in an economy.

   Reasons for Supplementing Wealth Tax with Income Tax One of the main reasons behindabolishment of wealth tax by countries such as the US, UK, Germany, Finland,Iceland, Sweden, Spain, and Luxemburg is the assumption of double counting inthe calculations. Some scholars argue that charging the income tax alongsidethe wealth tax is double taxation because these assets are the contributors tothe final income statements. Notably, this statement is true to a lesser extentbecause the wealth tax is only charged on the appreciation value or theattributed economic activities. In this regard, the wealth tax does not applyto unproductive or depreciating assets in the country (Piketty, 2015).

On theother hand, abolishing the wealth tax gives the wealthy a chance to accumulatemore un-taxable wealth through the appreciating value of the assets in thecountry. Moreover, the wealthy are motivated to own more assets, which are notturned into economically productive activities. As a result, the economicproductivity in the country declines as well as the industrialization factor.Furthermore, the social welfare deteriorates due to inequitable redistributionof resources. Literature Review According to Kayrouz, and Atala (2015),the main objective of wealth and income tax bills is to promote equity, andequality in the society. As such, the tax bills are supposed to be forms ofredistribution of wealth in the economy, where every region receives equitabledevelopment. However, recent development such as replacement of gift, income,and estate taxes with the progressive wealth tax does not promote equitablewealth distribution. In most cases, economists measure economic inequality bymainly focusing on the income statistics (Scarnicci, 2013).

Through suchunderstanding, the progressive wealth tax bill becomes the best metric forenhancing equitable development. However, charging the wealth tax on income isa shallow approach because not all wealth will be harbored in an incomestatement. In this regard, the progressive tax bill does not comprehensivelyenhance equitable distribution of resources because the income statement is notan efficient mode of measuring the equality in an economic region. In economicsperspective, wealth is a measure of accumulated assets; hence, the tax billshould focus mainly on the overall assets accumulation but not the returnsinspired by the asset accumulation. According to (), a person may have ahigh-income statement but a low accumulation of assets while another individualmight have a high accumulation of assets but a lower income statement.

In thisregard, using the progressive tax bill to tax the two individuals will resultin inequitable wealth distribution because the wealthy will be favored.Therefore, eliminating estate and gift taxes will widen the gap between thepoor and the rich in the economy, which will result in low living standards anddeteriorating social welfare. Markedly, Trump administration’s tax billabolished the gift and estate taxes by placing them under the income tax. Inthe short run, there will be a short deviation on economic progress but in thelong run, the economy will suffer from inequitable distribution of resourcesdue to the progressively increasing gap between the wealthy and the poor. A research conducted by Vermeulen, (2017)shows that some of the tax systems are greatly influenced by the nationalpublic debt. For instance, in 2013, the IMF introduced a 10% tax levy in theEuropean countries in the attempt of reducing their public debt.

Notably,increasing the tax levy on enterprises and individuals to repay the nationaldebt makes the country to lag behind in terms of development. According toMarxist theory, the revenue collected from taxation should be used mainly fordevelopment and promotion of social welfare. Therefore, the funds should tosupport systems such as education and healthcare. Evidently, stabilizing thehealth sector increases the economic productivity of a country due to theresulting sustainable labor force. The increased productivity enables thecountry to experience a favorable balance of trade; hence, the total revenuecollected by the federal government increases.

On the other hand, investing oneducation enables the country to become innovative and creative, especially inthe industrial sector. As a result, the country experiences highindustrialization rate, which raises the number of exports in the country. KarlMarx argued that the revenue collected on increase in productivity, especiallythe custom duty charged on the export and imports should be used partially tosupplement the budget deficit while the rest should repay the national debt. Inthis regard, the country will experience a sustainable growth rate. However,using the wealth and income tax to repay the national debt directly willdestabilize the economy by reducing the economic productivity and growth ratein the short-run.

In the long-term, the economy will be rendered stagnant orcontract a depression due to low production rate and high governmentexpenditure.  Roxana-Manuela, and Daniela-Neonila (2014),argues that optimal tax on capital income can be improved and perfected byintroduction of capital market imperfection in models with or without relativeeconomic inheritance. One of the main factors that make the optimal capitalincome positive is its efficient mode of redistribution of wealth from theowners of capital to non-owners of capital. The optimal capital model showsthat income taxation is only positive when the consumption is positivelycorrelated with savings. However, computing the numerical values for optimalcapital tax rates leads to imbalance wealth distribution in the society. Withregard to these metrics, the optimal capital model taxes the old highly, whilethe young are taxed at a considerably lower rate. Thus, the model cannot beused as reliable and responsive metric towards wealth distribution because itbases its focus not on the economic activities but on the age group. Notably,old age does not necessarily translate to wealth or young to poverty; hence,basing the model’s argument on age brackets does not solve the equality andequity problems.

In his research Gatt (2014), foundthat wealth tax is the best means of promoting equity in regional developmentbecause it is the most efficient way of reducing the gap between the wealthyand the poor. By charging taxes on the assets held, will enable the governmentto turn most of the unutilized resources in the country into productiveeconomic factors. For instance, charging tax on the huge amount of land ownedby the wealthy people in a country will inspire them to start economicactivities on these assets rather than leaving them idle. According to MiltonFreidman, a United States economist, abolishing the wealth tax in the countryhas motivated the rich people to transform their cash into long-term assetssuch as land and other real estate assets (Venkataraman, 2014). However, thistransformation of current assets into long-term assets reduces the country’seconomic power since these resources are not engaged in economic production.

However, the owners benefit from the consistent appreciating value of theassets. Therefore, the state is left to suffer as the wealthy continues toaccumulate wealth in a more consistent manner. The poor on the other hand, donot have many assets and most of their income is derives from the salaries,wages, rents, and commissions, which are all liable to income tax deductions.In this regard, abolishing the wealth tax gives the wealthy a chance to evadetaxes while the poor continue to suffer the wrath of high taxation bills.  Evaluation and Economic Analysis Admittedly, imposing wealth tax isone of the most influential means of promoting the efficient allocation ofresources in the country. One of the main factors that enhance the efficientallocation and redistribution of wealth is contributed by the increased revenuecollected. By levying a tax on the property, assets, and gifts, the governmentwill acquire more revenue, which will be used to supplement budget deficit andpromote economic growth rate (Saez, & Zucman, 2016). Moreover, thegovernment will have more resources at its disposal, which will lower itspublic borrowing rates.

In this regard, the economy will be sustainable becausemost of its revenue will be invested in long-term projects such as educationand healthcare. Therefore, the wealth tax will not only solve the economicconstraints in the short run but also enhance economic sustainability in thelong run. Apart from enhancing efficientallocation of resources, the wealth tax will also enable the country toincrease its productivity because taxing property owned such as on the real estatewill motivate the wealthy to turn their assets into productive activities suchas building rental houses or starting ranches or firms (Roine, , 2015). In this regard, the country will experience an upsurge ineconomic activities, which enhance high growth rate in the industrial sector.Moreover, more job opportunities will be created due to the rising demand forlabor in the real estate assets. In general, turning the idle assets intoproductive activities will enable the economy to grow and acquiresustainability in the both short- and long-term basis.

On the topic of redistribution ofwealth and reduction of the wealthy and poor gap, the wealth tax will serve asan efficient and responsive platform. Markedly, the revenue collected from thewealth tax will reduce the budget deficit, which will relieve the pressuremounted on the income tax (Jones, 2015). Therefore, by charging the wealth tax,the economy will realize friendly and manageable income taxes, which willenable the poor to start saving for investments.

On the other hand, the wealthywill not have an easy way out of conserving their wealth and will be pushedtowards generating more wealth through avenues such as industrialization.Therefore, the economic activities in the country will increase at a high rate,which will lead to more revenue collection. Furthermore, the increased amountof savings will enable the citizens to engage in investment activities such asentrepreneurship and stock exchange markets. In this regard, the social welfarewill be promoted as the standard of living in the country raises. In the longrun, the country will experience economic prosperity and high bargaining powerin the international markets.   Recommendations Although wealth tax suffers somelimitations, abolishing it does not lead to economic stability in a nation butinspires more development constraints and inequitable distribution ofresources. In this regard, economists should devise a more inclusive model thatwill harbor both income and wealth tax concurrently to not only enhanceefficient allocation of resources but also reduce the poverty rates in theworld.

Notably, endorsing the income tax alone as the main form of wealthdistribution does not benefit the poor because they are mainly dependent on thesalaries and wages. On the other hand, the wealthy can evade taxes by investingin the real estate businesses, where they buy a huge chunk of land, and leavethem unattended. Given that the land will appreciate in value, the wealthy areassured of a consistent form of untaxable income while the poor are left tosuffer the wrath of the income tax. It is the mandate of the federalgovernment to raise revenue through taxation systems, which will be used tosupplement budget deficits and finance projects such as healthcare,infrastructure building, and education. Therefore, the government should use acomprehensive and inclusive means of raising the taxes without favoring anygroup in the economy. In this regard, the wealth tax should be imposed on allthe assets owned in the state regardless of whether there are economicactivities going on or not. This will motivate the asset holders to transformthem into productive entities. However, the taxation policies should avoid theproblem of double counting when charging both the income and wealth tax onindividuals and enterprises.

In this regard, the country will experience aswift and sustainable economic growth in both short and long run.  Conclusion For any economy to functionsustainably, an efficient, responsive, and equitable taxation system must bedeveloped and implemented effectively. The main characteristics of an efficientand responsive taxation system include equitable distribution of resources,inclusivism, equality in levying mechanism, and sustainable on the cost.Moreover, the metrics used to charge the taxes must be comprehensible and easyto understand. In this regard, the government should charge affordable incometaxes to all the employed citizens to enable the state to raise enough revenue.On the other hand, the assets, gifts, and property owner should also be liableto taxation. For instance, charging the tax real estate appreciation value willenable the government to accumulate more revenue.

Moreover, appreciation levywill encourage the asset owners to convert their assets into economicproduction forms such as building rentals. Incorporating the wealth and incometax in the national taxation system will reduce the pressure mounted on theincome tax, which will enable the poor to save due to the low rates oftaxation. As a result, the poor will start investing in entrepreneurship orstock market avenues, which will reduce the gap between them and the rich inthe long run.            ReferencesPiketty, T. (2015).

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