Taxation (Read First Post)

[pmaitra]

Taxation

This is a generic thread for discussing taxation systems followed in India, outside India, in present times, and in the past; as well as proposed future taxation systems. While political discussions are ok, this should be kept at a minimum, so as not to turn this thread into a political demagoguery.

You are requested to avoid pejoratives and slangs. Please do not use terms such as, but not limited to, "Italian Waitress," "CongrASS," "Chacha Rangeela," etc..

Please keep it civil, and absolutely no expletives and no flame-baiting.

Some related threads:
http://defenceforumindia.com/forum/...s-why-mainstream-views-different-reality.html
http://defenceforumindia.com/forum/politics-society/54336-bjp-looks-tax-free-regime.html

(if anyone desires to add a thread to this list, please report this post with the link)

 

[pmaitra]

The 7 States With No Income Tax

By Dan Dzombak

There are seven U.S. states with no income tax, yet a life of paying less taxes isn't as simple as picking up and moving to one of them. You should take into consideration how each state makes money, and also local taxes.

The 7 States With No Income Tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

While these states have no income taxes, they fund themselves through other taxes including property taxes, corporate taxes, and sales taxes. If you are considering moving, you should consider all the taxes in a state and how those will affect your particular situation.

How states make money with no income tax
Let's go through the states with no income tax one by one using the Tax Foundation's most recent data, which is for 2010. The Tax Foundation has been collecting data on taxes since 1937 and its data takes into consideration an average of both state and local taxes.

1. Alaska
Alaska is known for its pristine wildlife as well as its oil and gas resources, most notably its North Slope with the famous Prudhoe Bay oil field. Alaska funds itself with royalties from oil and gas production as well as a 9.4% corporate income tax rate. In 2012 oil and gas royalties made up 83% of the state's revenue and oil and gas corporate income taxes made up just under 8% of revenue. The state has no sales tax but local municipalities have varying sales taxes and property taxes. In 2010, per capita property tax was $1,865, and combined with all other taxes, the per capita state and local tax paid was $3,214 according to the Tax Foundation.

Those 65 and over should note that Alaska exempts senior citizens from the first $150,000 of assessed value for property taxes.

2. Florida
Florida is known for its great weather (minus hurricanes), tourism, and snowbirds. Florida funds itself with a 6% sales tax as well as a 5.5% corporate income tax. The sales tax made up 73% of the state's revenue in fiscal year 2011-2012, with the corporate income tax making up 8.3%.

In 2010, per capita property tax was $1,507, and combined with all other taxes, the per capita state and local tax paid was $3,728 according to the Tax Foundation.

3. Nevada
Nevada is obviously best known for gambling and tourism. The state funds itself through a 6.85% sales tax. In the 2011-2012 fiscal year, sales and use taxes made up 71% of the state's revenue. The state has no corporate income tax, which has helped it attract tech companies and start-ups from high-tax California. Many companies take advantage of the lack of a corporate income tax, and Las Vegas in particular is attracting start-ups through the efforts of Zappos' CEO Tony Hsieh's DowntownProject. In 2010, per capita property tax was $1,297, and combined with all other taxes, the per capita state and local tax paid was $3,297 according to the Tax Foundation.

4. South Dakota
South Dakota is known for Mt. Rushmore, Badlands National Park, and Wall Drug. (Have you dug Wall Drug?) The state funds itself through a 4% sales and use tax, a $0.22-per-gallon gas tax, and fees on vehicles, but has no corporate income tax. In fiscal year 2012 the sales and use tax made up 65% of the state's revenue, motor fuel tax made up 8%, and car titles and registration fees made up another 8%. In 2010, per capita property tax was $1,142, and combined with all other taxes, the per capita state and local tax paid was $3,035 according to the Tax Foundation.

5. Texas
Texas funds itself through a 6.25% sales tax, taxes on motor vehicle sales and fuel, a 0.5%-1% franchise tax, and taxes on oil and natural gas production. In fiscal 2012 the sales tax made up 39% of the state's revenue, motor vehicle sales and fuel taxes made up 10.8%, franchise taxes made up 7.3%, and taxes on oil and natural gas made up 5.8%. In 2010, per capita property tax was $1,292, and combined with all other taxes, the per capita state and local tax paid was $3,104 according to the Tax Foundation.

6. Washington
Washington funds itself through a 6.5% sales tax and a gross receipts tax on businesses. Washington benefits from being surrounded by Idaho and Oregon, both of which have corporate income tax rates above 7% and individual income tax rates above 7%. In fiscal 2012 the sales tax made up 64.7% of revenue while the gross receipts tax contributed 17.6%. In 2010, per capita property tax was $1,257, and combined with all other taxes, the per capita state and local tax paid was $4,261 according to the Tax Foundation.

7. Wyoming
Wyoming funds itself through a 4% sales tax, taxes on natural resources production, as well as property taxes, which for residential property is 9.5%. Most of the state's revenue comes from its natural resource production and property taxes on resource owners. In 2010, per capita property tax was $2,663, and combined with all other taxes, the per capita state and local tax paid was $3,721 according to the Tax Foundation.

More than just states with no income tax
There's more to consider before moving than just tax rates, but it doesn't hurt to start there, especially if you are living off interest and dividends.

Source: The 7 States With No Income Tax

 

[pmaitra]

Flat Tax Pros and Cons

By Madhurjya Bhattacharyya

Due to the disparity in the tax structure, many thinkers have proposed to implement a flat tax structure. In this article, we will try to understand the concept of flat tax and the benefits and repercussions involved in its implementation.

A lot of Americans are unanimous in their perception that the tax codes in the country have become indecipherable. Anytime a lawmaker or someone running for an office joins in with the rest of the crowd to proclaim that the country needs a new tax code, he is being greeted by cheers and admiration. If a vast majority of people can't really understand the way they are being taxed, calls for a change in the taxation policy are inevitable.

All the concerns with the current tax policy call for a 'fair' and 'flat' taxation policy - one which addresses the concerns of those earning more than others, and also at the same time makes it simpler for a layman to file his own tax returns. The alternatives that have come up over the past few decades have centered around a flat or a fair tax structure, borrowing from the idea developed by American economists Robert Hall and Alvin Rabushka.

In the current scenario, people are taxed according to the money they make; people who earn higher are taxed at a higher rate than those who earn lesser. This system of taxation is progressive in nature. Also, there are a host of deductions and exemptions that one qualifies for - something which makes the whole process for filing income taxes a nightmare for most people. The idea of a flat tax structure has been put forward to counter the complexity of the current tax system. The proposition has been debated vociferously among the thinkers and academicians, with Congress being also introduced to it, but flat taxation has its own share of challenges that make its implementation imprudent.

Flat tax, simply put, is a single, uniform tax levied on every taxpayer. It doesn't distinguish between people on the basis of their income and is devoid of any deductions and exemptions in the true sense.

One might find flat tax Utopian, but, in reality, there are some adjustments to the basic rule of flat tax that its proponents want to include. To ensure that low-income families are not penalized unfairly, proponents want to have a personal exemption that will allow larger families to a have a lesser taxable income. The rate of tax that has been proposed ranges between 14% to 21%.

The Case for a Flat Tax System (â–²)

One of the prime reasons why proponents of flat tax want to change the existing 'progressive' tax system is its monstrosity. The current tax code is spread over thousands of pages, and even people with honorable degrees in economics and finance find it difficult to find out the exact amount they owe to the state or the amount of refunds they are entitled to. This was clearly demonstrated to the world by Money magazine, which sent fictional tax returns to 45 different tax-preparers. To everyone's surprise, each quoted a different amount! Flat tax aims to simplify the very process for filing taxes, so that everyone is able to figure out the process of taxation and the need of tax-preparers is eradicated. According to an estimate by a non-partisan body, Americans shell out around $300 billion every year, not as taxes, but on paying the people who help them with the whole process of tax payments. Consider the amount of money that individuals will be able to save if flat taxation comes into effect.

There are certain loopholes in the current tax system which allow powerful people to gain undue advantage. As these people are able to hire the services of a CPA or a tax-preparer, they use loopholes like the deductions and the exemptions to pay lesser taxes. Poor and middle-class people, who can hardly afford such services end up paying the base rate. Also, a lot has been reported on the misuse of public money on political donations. Implementation of a flat tax system can put an end to all these activities.

The progressive tax system demands that the more you earn, the more you are liable to be taxed. Supporters of flat tax argue that such a system discourages aspiring entrepreneurs. A flat tax system will encourage entrepreneurship, which in turn will lead to creation of new industries and jobs.

The very idea of filing taxes gives most people jitters, and coupled with the complications and the anomalies involved, some people are inclined towards evading taxation. Hiring a tax-preparer or a CPA can be unaffordable for many, which can also contribute towards tax-evasion. With a clear-cut system in place, most people will find it easier to file their taxes rather than risking themselves with law enforcement agencies.

The Case Against a Flat Tax System (â–¼)

Opponents of the flat tax system claim that such a system will unfairly target the poor, who are better off with the current progressive tax system. As people will be taxed at the same rate, people with higher incomes will have higher disposable income to cater to the basic necessities of life. An exemption in the personal income may address this concern, but opponents argue that the basic premise of shifting to a flat tax will be defeated; room for one exemption may lead to other exemptions in future with change in government policies. Even with an exemption in place, many thinkers say that the poor are better off with the progressive tax system as they are paying a low tax (under 10%), and with a uniform tax rate of, say 17%, they will be liable to pay more to the government.

As per the current tax system, workers are entitled to several deductions, like contributions to charities, mortgage payments, earned income credit etc. With the implementation of flat tax, all these deductions will cease to exist and there will be no scope for a tax refund. This will certainly eat into the resources of low-income families.

Although supporters of flat tax system are aware of the repercussions it will have on the revenue generation of the government, they are optimistic that in the long run, there will be enough entrepreneurs and industries to fill up the state coffers. However, the reality is that when a 35% tax rate on the high-income family drops down to below 20%, the revenue generation mechanism will be seriously affected. This in turn will affect the country's annual budget, making the country economically and politically weaker.

Another concern that has been raised in many quarters is the future of hundreds of thousands of people who derive their livelihood from the confusing tax code that is in place! If flat tax was to be implemented, CPAs and tax-preparers will be out of jobs and a whole industry will cease to exist. Add to this another 100,000 employees of IRS, and you have a potential problem in your hands. Proponents of flat tax also express awareness of the problem, but maintain that it is the duty of the government to employ these people.

In the present scenario, companies get a deduction for contributing to the retirement plans of their employees, however, in case of a flat tax system, there will be no such deduction and the employer will withdraw his share of the contribution. The employees too, will shy away from putting money in their retirement plan in the absence of deductions. Such a scenario will lead to a huge dependency of baby boomers on the government.

On the face of it, a flat tax policy looks every bit any policy for the people should be - it taxes everyone by the same rate, simplifies the whole procedure of filing for tax returns, and rewards investments and entrepreneurship. However, if we dig deeper, we will understand that there are a host of issues that need to be addressed before implementing a flat tax policy. The whole debate on flat tax is nebulous, and voluminous books have been written on this subject, therefore, we don't claim to have exhausted everything that is there to a flat taxation system. We will be glad to read the opinion of our readers on this subject.

Read more at Buzzle: Flat Tax Pros and Cons

 

[pmaitra]

Lessons from the Russia's 2001 Flat Tax Reform

Yuriy Gorodnichenko, Jorge Martinez-Vazquez , Klara Sabirianova Peter, 19 February 2008

Russia's economic and fiscal successes since adopting a flat tax in 2001 have bred enthusiasm for tax reform amongst casual observers. This column summarises research investigating the flat tax's effects and suggests that many of the gains came from reduced tax evasion in Russia.

Tax evasion is a pervasive worldwide phenomenon. It is widely believed that high personal income tax rates are partially responsible for high levels of tax evasion everywhere, especially in emerging markets. High personal income tax rates are also often associated with negative effects on the real side of the economy. Indeed, the high elasticity of taxable income with respect to tax rates typically reported in the public finance literature implies sizable deadweight losses in the presence of high personal income tax rates (e.g., Feldstein, 1995). Given these considerations, it is not surprising that over the last two decades there has been a global trend toward the gradual reduction in the level and progressivity of personal income tax rates. Recently, some countries have even taken more radical steps in the same direction.

In January 2001, Russia introduced a fairly dramatic reform of its personal income tax, becoming the first large economy to adopt a flat tax. The Tax Code of 2001 replaced a conventional progressive rate structure with a flat tax rate of 13 percent. Over the next year after the reform, while the Russian economy grew at almost 5% in real terms, revenues from the personal income tax increased by over 25% in real terms. Besides this revenue yield performance, advocates also have credited the flat tax with beneficial changes in the real side of the economy. The Russian experience would appear to have been so successful that many other countries have followed suit with their own flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

What happened in Russia?

While Russia's flat tax reform has created much excitement, little solid evidence on its impact on tax evasion or the real side of the economy has been provided thus far.1 In recent research (Gorodnichenko et al., 2008), we argue that the flat tax reform was instrumental in decreasing tax evasion in Russia, and that, to a certain extent, greater fiscal revenues in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting. We also find that the productivity effect on the real side of the economy was positive, although smaller than the tax evasion effect.

As income underreporting is not observable by definition, we use data on reported consumption and income to infer tax evasion. Under the permanent income hypothesis, current consumption should equal a share of permanent income. Assuming that consumption expenditures are fully reported, the discrepancy between consumption and income, which we call the consumption-income gap, indicates that households underreport a portion of their income. We perform a series of checks to verify that the consumption-income gap is an informative indicator of tax evasion and find that the behaviour of the consumption-income gap is consistent with common tax evasion determinants.

Since Russia's reform decreased marginal tax rates for only some groups of people, we use the variation across time and taxpayers to identify and estimate the effects of the flat rate income tax reform. We find that, ceteris paribus, the consumption-income gap decreased by 9 to 12% more for those households that experienced a reduction in marginal tax rates. That is, the most significant reduction in tax evasion was for taxpayers that experienced a decrease in tax rates upon introduction of the flat tax. We also find that this decline in tax evasion was likely due to changes in voluntary compliance, as opposed to greater enforcement efforts by the tax administration authorities. In contrast, the productivity effect, measured by the relative increase in consumption for households that faced smaller tax rates after the reform, was zero at the threshold and about 4% for those taxpayers that experienced the decrease in tax rates over a four-year period.

This strong evidence of a positive relationship between (lower) tax rates and (lower) tax evasion stands out from previous studies of tax evasion that used cross-sectional data and provided only ambiguous results. Our method of using longitudinal household budget surveys to estimate the effects of significant changes in the tax structure might be used to revisit the topic. Given the data required, it may be possible to infer tax evasion and the effects of tax reform for a wide range of countries.

Policy implications

Our Russian results have several important policy implications. The adoption of a flat rate income tax is not generally expected to lead to significant increases in tax revenues because labour supplies are believed to be fairly inelastic. However, if an economy is plagued by ubiquitous tax evasion, as was the case in Russia, then a flat rate income tax reform may lead to substantial revenue gains via increased voluntary compliance. At the same time, a strong evasion response suggests that the efficiency gains from the Russian tax reform perhaps are smaller than previously thought. Using observable responses of consumption and income to tax changes, we find that the tax-evasion-adjusted deadweight loss from the personal income tax is at least 30% smaller than the loss implied by the standard method based on the response of reported income to tax changes. While a flat tax offers tangible efficiency gains, its reduction of tax evasion may be most important.

References

• Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy 103(3): 551-572.
• Gorodnichenko, Yuriy; Jorge Martinez-Vazquez; and Klara Sabirianova Peter, 2008. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," NBER WP 13719.
• Ivanova, Anna; Michael Keen; and Alexander Klemm, 2005. "The Russian Flat Tax Reform," Economic Policy 20(43): 397-444.
• Martinez-Vazquez, Jorge; Mark Rider; Riatu Qibthiyyah; and Sally Wallace, 2006. "Who Bears the Burden of Taxes on Labor Income in Russia?" AYSPS International Studies Program Working Paper, No. 06/21.

Source: The effects of Russia's flat tax | vox

 

[Decklander]

there shud be no IT on any individual. We have a very funny situation in India. Over 75% population does not pay any tax at all but takes largest amount of subsidy and while over 50% of them will qualify to be in lower income group, they just prefer to call themselves poor to avail of the state benefits and subsidies. Having to tax regime will address this disparity and making it consumption based will bring in sanity. A poor due to his lower income and lower consumption will pay less tax while a rich will have to pay more for his affluent life style. No one India is willing to tax the income from agriculture for vote bank politics. But we all know that nearly 20% of all farmers in India are super rich and they earn more than what a VP of a MNC earns.

 

[pmaitra]

Tax, and its effect on Texans

(This is not my original content, and it is being presented here on conditions of anonymity.)

There are indeed pros and cons. Not having a state income tax means the state has to make its money in other ways. Sales taxes and property taxes are the big ones here (aka flat taxes); so how much you pay depends largely on how you make money, how you spend it, and how/where you live (as opposed to how much you make). There are viable arguments that a state income tax would be simpler and more equitable; but knowing how politicians are, I'm guessing such a thing would just be added on top of what we already pay. In any case, income taxes are illegal under our archaic, post-reconstruction constitution.

-If you're a professional living in a city apartment/house with only one vehicle (or no vehicle), the taxes here are low.

-If you're a rancher/farmer/business-owner with lots of land, buildings, and vehicles who has to make frequent/large purchases, the taxes here can kill you.

-Also not coming-off well are those with lower incomes, since they still have to pay the same property/sales taxes as everyone else.

 

[W.G.Ewald]

North Carolina, under Republican governor and legislature, may eliminate personal income tax.

 

[pmaitra]

North Carolina, under Republican governor and legislature, may eliminate personal income tax.

That would be a welcome change, at least for me.

 

[parijataka]

Very useful thread @pmaitra ji !

PS : heard of `Chacha Rangeela` nickname for the first time...

 

[W.G.Ewald]

Have you noticed the fastest-growing states all have Republican governors? by Andrew Malcolm - Investors.com

 

[Decklander]

Very useful thread @pmaitra ji !

PS : heard of `Chacha Rangeela` nickname for the first time...

I have used it so many times for Nehru here.

 

[Simple_Guy]

Advance Tax​

Generally in India, if your tax liability is more than Rs 10,000, then from the next year you have to pay "Advance Tax" in three installments. Payable in September, December and March. Earlier it was only for companies but has been extended to individuals.

Advance tax is applicable when an individual has sources of income other than his salary. like capital gains on shares, interest on fixed deposits, winnings from lottery or races, capital gains on house property besides his regular business/salaried income. then after adjusting for expenses or losses you need to pay advance tax.

It's a major headache because the tax payer has to actually estimate the income for the entire year. It becomes confusing if you are investing in the stock market and making capital gains/losses.

Failure to pay advance tax draws a financial penalty at the high interest rate 1% per month.

But senior citizens (60 years or more in age), who do not have income from business or profession, are exempted from paying advance tax.

 

[Simple_Guy]

Nine reasons for getting an income tax notice