Public Finance Taxation

For the average individual understanding the taxation debate has always been very difficult and continues to be so. Therefore it is rather unfortunate that people increasingly do not seem to understand the government’s taxation policies and more so as, those who do, misinterpret the taxation debate.
Many such people harp on some big tax breaks that the rich and the famous enjoy but fail or refuse to see the logic behind such policies. They just get stuck on the premise that only the rich get the tax breaks although in reality government is actually encouraging the wealthy people to spend their money in a certain way to receive a tax break.

Usually such breaks involve only indirect taxes. Any economic system that is focused on positive and sustainable growth based on the principles that influence free market enterprise would normally encourage a wealthy individual to spend as much of his money as possible.
Most successful economies understand that this is good for long term growth because when a rich individual buys expensive articles like an airplane or an estate then someone gets a job somewhere.
Beginning with the people who work in the factory that makes the airplane to the people who maintain the estate, everyone needs a job. While this is not the only way that the economy grows it does contribute in a significant manner toward the overall growth in the economy.

Critics of the government’s tax policies often complain that the tax exemptions offered to the rich and the famous are too deep and there just is not enough money in the state treasury to be used for public welfare especially for the poor. But it is accepted even within sections of the government machinery that in reality there is a lot of wastage of public funds as most of the money hardly ever reaches the poor people. There could be a number of reasons for this state of affairs ranging from poor welfare delivery mechanism to corruption and misappropriation of funds but the fact remains that public funds almost always do not reach their goals.

Another major area of dispute is VAT (Value Added Tax) which is an indirect tax. For instance anything bought from across the border requires the buyer to pay VAT and that is when the question arises about whom to pay the VAT and who is the taxing body for the purchase? Some countries suggest that it should be the place of sale, while others maintain that it should be the country in which the use or consumption of the product or service takes place. Since this can lead to a great deal of confusion about who is paying taxes to whom, it can also lead to unfortunate cases of double-taxation or cases where the confusion leads to complete and unnecessary absence of taxation.

Consequently a number of proposals designed to decrease confusion about the application of VAT and allow businesses the peace of mind that would inspire them to invest freely across borders and in places that they feel offer good prospects of profitability. Most experts accept that the economic development that would occur would be universally beneficial. Therefore in the absence of internationally agreed-upon rules for the application of VAT, there can be some confusion about the implementation of an equitable and universal taxation policy. The OECD (Organization for Economic Co-operation and Development) is trying to put an end to this confusion in international trade and taxation but it seems VAT is here to stay. VAT has a strong fundamental basis and it is a question of time before it is accepted across the board.

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Last Updated on : 1st August 2013

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