KLM Tax System
This paper pays attention to how a tax system can be developed to accommodate social justice in the Republic of KLM. Before proposing a suitable tax system for the country, then it is wise to pay attention to the concept and issues plaguing the KLM current tax system. Balancing the tax burden and potential, examining tax systems for effectiveness, and taxation progressiveness and equity are just some of the issues that the tax system ought to address. Efficient tax policies must be pegged on the Principles of Tax Systems. Though the principles are ethical, they only address the issue of revenue collection. . Don't use plagiarised sources.Get your custom essay just from $11/page
Table of Contents
Essential Concepts and Issues Concerning Tax System.. 5
Figure 1: The number 1 below shows the Estonian personal income tax revenue since 1994 to 2021 9
The Guiding Principles of a Good Tax Policy. 9
KLM’s Proposed Tax System Reforms. 13
- Land Value Tax. 13
- Natural Person’s income tax. 14
- Social tax. 14
- Corporations’ income tax. 15
- Value Added Tax. 15
Figure 2: A supply-demand analysis of a taxed market 16
Introduction
Globally, the winning socio-economic model is what shapes the tax systems. The socio-economic systems often showcase the power equilibrium within a given society, and they are crucial in realizing social justice (Lierse & Seelkopf, 2016). This paper delves deep into how a tax system can be developed to accommodate social justice appropriately in KLM, a made upcountry.
The tax justice concept is relevant to the people who feel left out of the economic opportunities within a country (Mankiw, 2020). The impetuous protests, which rocked Jordan in 2018 as a response to tax reforms, just indicates how emotive the issue of tax systems can get (Schiffer, 2018). The uproar by the masses shows the need by nations’ to reform their tax systems in a manner that holds the needs of the citizens by heart (Schiffer, 2018). Hence, everyone’s opinion will be considered in designing the KLM’s tax system, and the country’s history will also inform some critical decisions.
In KLM, a team is supposed to scope out a design for an efficient tax system, which takes into cognizance the country’s general vision of social justice. KLM wants to learn from the past mistakes and successes of other countries and do what is right for its citizens by coming up with a tax system that protects all. The tax system that is envisioned by the administration is supposed to hold the needs and wants of the KLM citizen at heart. The laws being proposed are based on the Guiding Principles, and they take note of the poor man’s struggle (Lierse & Seelkopf, 2016). Hence, the tax laws are supposed to be progressive. The tax laws should capitalize on direct taxes. The VAT, an indirect tax, should be kept at slow as possible to protect the impoverished members of the KLM republic.
Tax Justice
The term tax justice was coined by civil society to enable the masses to put across what they want in a tax system (Alt, 2018). Tax should be a social welfare issue, giving it a rights-based approach to leadership and making sure that the voiceless are listened to, just like the voices of the firm and influential (Mirrlees et al., 2011). To make the tax justice comprehensive, it has been proposed that it should have two aspects, including; horizontal and vertical justice. The parallel justice suggests that two taxpayers shackled by the same conditions pay an equal amount of tax (Alt, 2018). The vertical justice proposes that the people faced with distinct economic challenges be handled differently in the manner that their tax responsibilities are different (Mirrlees et al., 2011). Hence, people under excellent economic conditions pay more.
The social justice benefits from tax justice in the following ways;
- Financing a public-related expenditure, which serves a critical role in decreasing inequality, helps meet the problems of the masses, and this leads to the realization of rights.
- The tax justice ensures that the burden of tax is equitably distributed, and it also helps in the redistribution of wealth, thus leading to the realization of social justice.
Analyzing and designing the KLM’s tax system, then tax justice will be held with utmost regard because it informs how the poor and vulnerable can be protected. The measures it proposes are not only progressive, but they promote fairness and equity.
Important Concepts and Issues Concerning the Tax System
The only way that the KLM tax system can be efficient and socially just is if it is capable of solving the following critical issues. The issues include:
- Balancing the tax burden and potential
A good and efficient tax system needs to provide adequate public services and also meet other costs. To achieve this, the tax burden placed on the taxpayers’ shoulders ought to be confined within limits that reciprocate the economy’s size, the taxpayers’ condition, and the administrations’ capability to get the taxes efficiently (Mirrlees et al., 2011). The tax burden refers to the gross amount of tax paid by the people to the government, as a fraction of the peoples’ income (Bird, 2013). The tax burden is normally presented as a ratio of tax to society’s income (GDP). On the other hand, tax potential refers to the limit of tax effort that can have negative impacts if surpassed (Mirrlees et al., 2011). Tax systems should always be confined within the positive side of the tax burden to avoid the negative impacts on the economy and also on its citizens.
- Examining tax systems for effectiveness
A tax system’s effectiveness should not only be measured in line with the generated revenues, but also in terms of the extent to which the revenues are utilized in supporting sensible plans for realizing development objectives and social interests (Lierse & Seelkopf, 2016). Hence, tax systems have to be analyzed in partnership with fiscal policy. In areas plagued by social inequalities, it is vital to ensure that the tax collected positively support the masses in fighting that particular inequality (Dom & Miller, 2018). Taxes collected are supposed to aid in economic development.
- Taxation progressiveness and equity
The general tax burden has to be shared equitably among the people so that an unreasonable effort does not land on the shoulders of the vulnerable or poor, as it would widen the economic and social gaps between the rich and the poor, leading to the concentration of wealth among a few members of the society (Lierse & Seelkopf, 2016). If tax systems impose high rates on the rich, then they are regarded as progressive, and they normally lead to a stable economy that is also inclusive (Mirrlees et al., 2011). This principle informs numerous tax systems globally, but it is usually taken for granted. It is undermined so that the wealthy can avoid paying their taxes (Lierse & Seelkopf, 2016). Hence, it is safe to conclude that tax systems are harbingers of the interests of the power within a country. Equity cannot be realized if the tax system is designed to fit the interests of the few rich men and women.
- Taxes Fair Differentiation
Globally, in regards to incomes’ direct taxation, many nations have several tax brackets laced with distinct marginal rates enabling the rich to pay more compared to the poor (Dom & Miller, 2018). For a tax system to be considered progressive, then it has adequate differentiation, which permits one to solve the inequality crisis. Differentiation is also utilized on indirect taxes of commodities depending on their use (Lierse & Seelkopf, 2016). This means that goods considered quintessential and utilized by all are tax-exempt or taxed less compared to luxurious commodities.
- The social contract and tax
The financing of crucial services by the administration can make taxes the critical meeting point between the people and its government, thus giving the citizens a sense entitlement about finances and policies that monitor their daily lives (Lierse & Seelkopf, 2016). For this to happen, then there is a need for transparency and accountability to the masses, which is not manipulated to support the greediness of the rich individuals within that society. The progressive realization of rights must be enabled (Mirrlees et al., 2011). Hence, the people will regard the tax systems as fair and this will make them support and comply with them.
- Direct and indirect taxation
Tax revenues are raised from both direct and indirect taxes. The two also vary from country to country, depending on the nation’s tax system and how their economy is structured (Dom & Miller, 2018). In the global south and most Arab countries, the greater fraction of revenues is made via indirect taxes while the direct taxes are quite low. Such a system leads to an inequality in the country, thus helping the wealthy minority to concentrate wealth among themselves. The VAT, which is an indirect tax, gets imposed on a wide range of goods and services just before consumption (Lierse & Seelkopf, 2016). Hence, it fails to distinguish between the wealthy and the poverty-stricken, especially if the rates do not categorize basic and luxurious commodity. Thus, it can be deduced that indirect taxation takes a toll on the impoverished. Women also suffer a lot when it comes to indirect taxation because they use a larger chunk of their money on essentials like food (Dom & Miller, 2018). The creators of the indirect tax defend as a means of spreading the burden across the wide tax base (Lierse & Seelkopf, 2016). However, indirect taxation needs to be reformed to promote equality. Informal employment makes it difficult for taxes to be collected, thus making it unpopular with the governments that have failed to ensure that social and economic rights promise.
An efficient tax system can balance the concepts and the issues raised to protect its citizens. Estonia is known to have an outstanding taxation system, as seen in figure 1 (Dom & Miller, 2018). The KLM tax system should borrow heavily from these modern days’ economies that have structured their tax policies to meet the needs of its citizens.
Figure 1: The figure 1 below shows the Estonian personal income tax revenue since 1994 to 2021
The Guiding Principles of a Good Tax Policy
For KLM to realize a good taxation policy, which protects the poor and buffers the rich from losing their wealth than the guiding principles, discussed below, must be properly employed. The first four guiding principle was developed by Adam Smith (Lierse & Seelkopf, 2016). These guiding principles, along with an extra eight, have been implemented for years by administrations and tax advisers.
- Equity and Fairness
Taxpayers in similar economic and social conditions should be taxed the same way. This principle is well explained in terms of equity. Horizontal equity demands that two people with similar capabilities remit an equal amount of tax (Lierse & Seelkopf, 2016). If one of the taxpayers has the greater capability of paying than the other, then the vertical equity comes along. Meaning that the taxpayer who is more capable of paying then should remit more taxes. Many refer to it as the fairness principle.
- Certainty
An efficient tax system should indicate how the tax to be remitted is determined, and when the remittance should be done, and the mode through which the payment ought to be done (Lierse & Seelkopf, 2016). A good tax system eliminates ambiguity, thus making the people certain of what they owe the government and the amount they are supposed to pay. A good tax system gives people the power to determine that which is taxable and at what rate (Dom & Miller, 2018). The people should possess the power of determining the liabilities with logical certainty, depending on the transaction. Suppose the transaction is easy to pinpoint and value, then one can claim that the principle of certainty has been realized.
- Convenience of payment
Conveniently enabling a needed tax remittance is paramount to the taxpayer. Convenient payments are vital in ensuring compliance with the system. If the system makes it hard for one to pay his or her taxes, then the scale tilts on the no payment side. The popular mechanisms of tax payment include withholding and intermittent (periodic) payments of the calculated tax liability (Lierse & Seelkopf, 2016). The right payment method is based on the amount of tax to be collected and the ease with which that can be performed. Technology can be introduced to make the system more efficient.
- Effective tax administration
The cost incurred in the collection of tax should be kept at the minimum. Reducing compliance costs is very crucial. The taxpayer compliance cost must also be considered. The administration should strive to simplify the system. The more sophisticated a tax system is, the higher the cost of administration and compliance (Dom & Miller, 2018). Appropriate innovations ought to be considered. The profits derived from reforms have to surpass the adoption cost.
- Information security
The administrators of tax should protect the data of the taxpayer from third parties. Their systems should be protected with sufficient “firewalls,” appropriate safeguards to curb the system’s degradation, and adequate measures that ensure the taxpayers’ data is only accessed by the intended persons as governed by the law (Dom & Miller, 2018). Failing to put in place the necessary security measures leads to the corruption of equity and effective administration principles.
- Simplicity
Easy to comprehend laws are a pre-requisite for the taxpayers to grasp the regulations and comply accordingly and in a way that saves them money and time (Dom & Miller, 2018). To both the administrator and the taxpayer, simplicity is key in every tax system. Sophistications make many to err and leading to a decrease in the number of people that are complying.
- Neutrality
Reducing the impact of the tax laws on a human’s decision is crucial. The fundamental objective of the tax is to facilitate government affairs but not interfere with a person’s business and decision.
- Efficiency and Economic growth
A good tax system is not supposed to curb an economy’s growth capability. Globally, taxes are known to serve as impediments to efficiency, but well-designed policies can reduce these effects. This principle is amplified by a tax system with the country’s economic objective.
- Visibility and Transparency
The people paying the tax should be informed on the existing taxes and how they can be imposed on them. On the other hand, visibility permits a person to know the transaction’s real cost. It also allows the taxpayer to know his or her liability and the amount being paid to the administration. Invisible tax makes it easy for one to retain it.
- Minimum tax gap
The tax laws should be structured in a way that encourages compliance. The distinction between the tax owed and the ones that are paid willingly is referred to as the tax gap. Both intentional and unintentional errors are the two things that lead to tax gaps. Sophistication in the tax laws can make many people noncompliant. To encourage compliance, withholding the taxes in the form of VAT just before they get to the final consumer or strict penalties to noncompliance.
- Accountability
The administration should ensure that the information is accessible and visible to the taxpayers at all times. All the proposed changes and reforms should be relayed to the masses to inform future debates. It is common knowledge that a tax system that is transparent commands the respect of the taxpayers (Lierse & Seelkopf, 2016). Before implementing a change, then several alternatives should be evaluated. The administration should put forward all the necessary information for the masses to gain an understanding of the tax system. Globally, the efficient tax systems are known to have the required levels of reliability, stability, and predictability to empower the state to decide on the possible amount to be collected and at what time (Carr, Davies & Davies, 2018). A tax system ought to be fluid and open to changes that can make it adapt to innovations. Hence, it is wise to keep reviewing the tax system every once in a while.
Challenges
Analyzing and developing the KLM’s tax system, then one has to admit that incorporating all the principles is next to impossible. The KLM’s tax system should also be confined within the country’s vision of social justice, such as curbing appropriate deductions to people earning below a particular amount (Carr, Davies & Davies, 2018). The desire to meet this social and economic obligation cannot allow the incorporation of all the principles since they only work together for revenue (Lierse & Seelkopf, 2016). The tax system is also subject to changes and this challenges the very principles of simplicity and certainty.
KLM’s Proposed Tax System Reforms
The proposed tax system is meant to buffer the low-income earners from financial shocks and also protect the hard-earned money of the rich. The KLM proposed tax system is progressive so that it can cater to the needs of the vulnerable and the impoverished. As a way of spreading the tax burden, then an indirect tax will be imposed on the masses, but it will be small to avoid crushing the vulnerable financially. The tax system heavily borrows from the Estonian tax system, and it also incorporates some of the reforms that were put forward by the Greeks to revamp their economy after it had collapsed. The tax system is also pegged on several principles of certainty but it has also discarded others for the sake of social justice.
The Tax System
The KLM’s taxation is made up of both the local and state taxes. Since the country is not endowed with minerals, a huge chunk of the country’s revenues are derived from consumption taxes, while the capital taxes are at their lowest.
a. Land Value Tax
KLM is going to levy a land value tax that will be utilized to fund the local municipalities. The tax will be a state-level tax, but in its entirety, it will be used to fund the functions of the local councils (Princen, 2016). The rate will be between the limits of 0.2 to 2.7 percent as depending on what the local council decides. It will be one of the crucial funding of the municipalities.
The land value tax will be levied on the land value only, and improvements are not part of the deal. To broaden its scope, this amount will also be paid by public institutions (Mirrlees et al., 2011). The land value tax will is a good source of revenue, and it will help spread the tax burden and hence protecting the vulnerable from higher tax rates.
b. Natural Person’s income tax
In KLM, a natural person’s income assumed proportional is introduced. The tax exemptions will make the tax progressive. The distinction between progressive and proportional has been highlighted in figure 3. The standard rate of natural persons is set at 20% (Mirrlees et al., 2011). The decision of choosing the 20% has been informed by the Estonian system, which is noted as the best in the world. Figure 4 highlights the Estonian personal income tax. A fundamental exemption is made, which rises upon an accident or an occupational disease, in the event of pension of even maintaining a child (Princen, 2016). Plus, many deductibles on certain expenses like donations, unemployment insurance, gifts, housing loan interests, and training expenses.
c. Social tax
The salaries paid to the citizens of KLM will be subjected to
- Social tax
- Funded pensions payment
- Unemployment insurance premiums
The social tax is proposed to stand at 31%. The 31% will also be utilized on the fringe benefits, which bosses provide for their subordinates (Princen, 2016). Both the bosses and the subordinates will pay the unemployment insurance premiums, 2.5% is withheld from the employee’s salary and 1.6% from the employer’s.
d. Corporations’ income tax
The corporate income tax will be 27% annually. It is important to take cognizance of the fact that, KLM’s proposed system of corporate taxation will be peculiar. The tax system will change the moments of taxation from the earning point down to the point of distribution (Mirrlees et al., 2011). Simply put, generating profits will not be regarded as an income tax liability. In situations where the profits are being divided proportionally to the stakeholders originated from dividends from foreign companies, then the tax of distribution will be withheld (Princen, 2016). Donations, gifts and other payments that are not linked to the business are regarded as the distributed profits.
e. Value Added Tax
The standard VAT tax rate will be set at 14% and the country will also have a reduced rate of 7% for commodities like the children’s car seat and energy-saving pieces of equipment. Medical, financial and postal services are some of the few commodities that will not be taxed (Mirrlees et al., 2011). To promote innovation, new products that still face lots of competition from commodities from foreign countries will be tax-exempt also (Princen, 2016). The VAT is viewed as a measure of distributing the tax burden across the entire tax base, but putting at a mere 14% is a way of buffering the KLM’s vulnerable members of the society from financial shocks. The issue with the VAT, as showcased in figure 2, tends to discourage production rather than consumption (Dom & Miller, 2018). That is wrong because it can cripple a country’s economy and hence the reason why the VAT has been set at 14%.
Figure 2: A supply-demand analysis of a taxed market
f. Tax administration in KLM
The responsibility for administering the taxes solely lies within the KLM’s Revenue Authority. The huge percentage of tax declarations will be made via the internet (Princen, 2016). The authority aims at over 95% presentation of taxes via the internet as that would make their processes run seamlessly.
g. Other Taxes
Other taxes that will be applied in KLM include:
- Custom duties
- Tax on heavy vehicles
- Excises on tobacco, packaging, alcohol, and fuel.
h. Tax evasion
Tax evasion refers to an illegal exercise in which an individual or an organization intentionally avoids remitting tax (Slemrod, 2019). In return, this decreases government tax revenue. If tax evasion is widespread within a given jurisdiction then it could curtail the government’s ability in paying its expenses (Princen, 2016). If the state is unable to sort out its expenses, it can either reduce spending, get a loan or raise taxes. Hence, KLM revenue authority must come up with ways that will prevent this from happening.
The method suggested is the tax lottery approach that is dependent on rewarding those who take part in fighting tax evasion. The tax lottery comes in handy when preventing tax evasion, given that the purchaser asks for supporting documents, minimizes the chance of the merchandiser avoiding declaring the transaction (Cruz, de Sousa & Wilks, 2019). The tax lottery system becomes an extra way of forcing economic agents to note down all the transactions that have been conducted.
Hefty penalties to all those caught in tax evasion scams will also be prosecuted (Mungwana-Zake, 2018). Fear of going to jail can also be enough catalyst for making people pay their taxes.
Conclusion
An efficient tax design has to be transparent and fair. The tax system should also have minimal losses and leakages, the issues of evasion should be minimized. Both the collection and compliance costs should be minimal to promote many people to comply. All these qualities match the tax design guiding principles, which have been adhered to while designing the KLM tax system. The tax system designed is simple and transparent and it is upon the state to be accountable to the citizens of KLM, to encourage tax compliance. VAT, an indirect tax has been proposed to be 14% to prevent financially crushing the vulnerable and the impoverished KLM citizens. A lottery system has been suggested as an effective way of curbing tax evasion, just like Taiwan did. Also, hefty penalties have been suggested as a measure of punishing those who fail to pay their taxes.
References
Alt, J. (2018). Tax justice & Poverty. Short Version of the Final Synthesis Report. Short Version of the Final Synthesis Report (November 2, 2018).
Bird, R. M. (2013). Taxation and development: What have we learned from fifty years of research? IDS Working Papers, 2013(427), 1-19.
Carr, D. L., Davies, K. J., & Davies, T. L. (2018). The Comparative Importance of 10 Guiding Principles Relevant to Tax Legislation. Journal of Accounting and Finance, 18(8).
Cruz, J. N., de Sousa, P. A. B., & Wilks, D. C. (2019). “Please give me an invoice”: VAT evasion and the Portuguese tax lottery
Dom, R., & Miller, M. (2018). Reforming tax systems in the developing world. Retrieved, 16, 2019.
Lierse, H., & Seelkopf, L. (2016). Capital markets and tax policy-making: A comparative analysis of European tax reforms since the crisis. Comparative European Politics, 14(5), 686-716.
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R.,… & Poterba, J. (2011). The Mirrlees Review: conclusions and recommendations for reform. Fiscal Studies, 32(3), 331-359.
Mungwana-Zake, E. N. (2018). Perceptions of informal traders towards taxation in Buffalo City Municipality (Doctoral dissertation).
Princen, S. (2016). Political Economy of Tax Reforms–Workshop proceedings (No. 025). Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
Schiffer, R. (2018). Protest as the last straw-A report on Jordan’s Tax Reform in 2018.
Slemrod, J. (2019). Tax compliance and enforcement. Journal of Economic Literature, 57(4), 904-54.
Appendix
Figure 3: The difference between progressive, proportional and regressive tax systems
Figure 4: Estonia Personal Income Tax Rate