Assignment

Of
Financial Decision Making:

SUBMITTED TO: SIR SHOAIB SAJJAD

SUBMITTED BY: HUMA ALTAF

REGISTRATION NO: FA15-MB1-004

DATE: 14

TH

APRIL 2016

Comsats intiturte of information technology sahiwal campus

Tax system
comparison
1
NO 1:
WHAT
SIMILARITIES AND
DISSIMILARITIES
ARE
BEING
OBSERVED BY YOU
IN EACH TAXATION
SYSTEM?

The IRS publishes

tax forms which taxpayers are
required to choose from and
use for calculating and
reporting their federal tax
obligations.

QUESTION

BRIEF
INTRODUCTION TO
EACH TAXATION
SYSTEM

The IRS oversaw the

Homebuyer Credit and First
Time Homebuyer Credit
programs instituted by the
federal government from
2008-2010. Those programs
provided
United
States
citizens with money toward
the purchase of homes,
regardless of income tax
filings.

The
Internal
Revenue
Service
(IRS) is a United
States government
agency
that
is
responsible for theHer Majesty's Revenue and
collection
andCustoms (HMRC) is a
non
enforcement of taxes.
The
IRS
wasministerial department (headed by
established in 1862senior civil servant rather than
by President Lincolngovernment official)of the
UK
and operates under
the authority of theGovernment responsible for the
United
Statescollection of taxes, the payment of
Department of thesome forms of state support, and the
Treasury.
It
isadministration of other regulatory
primarily engaged in
national
the collection ofregimes including the
following types ofminimum wage. HMRC was formed
taxes (55% of U.Sby the merger of the Inland Revenue
government revenue)
and Her Majesty's Customs and
Excise which took effect on 18 April
Individual
2005. Different forms of taxes are:
income tax
Other administrative
functions

Direct tax
Income
Corporate

Capital tax
Capital Gain tax
Inheritance

Environmental tax
Air passenger duty
Climate change tax

Indirect tax
Value added
Excise

Other administrative
Functions:

1
ove

Impr
the

extent to which individuals

and businesses pay the tax
due and receive the credits
and payments to which they
are entitled and Improve
customers' experiences of
HMRC and improve the UK
business environment.

The Federal Board of Revenue is the semi-autonomous, supreme federal agency of Pakistan that is
responsible for auditing, enforcing and collecting revenue for the government of Pakistan. The
Central Board of Revenue (CBR) was created on April 01, 1924 through enactment of the Central
Board of Revenue Act, 1924. In 1944, a full-fledged Revenue Division was created under the
Ministry of Finance. FBR primarily operates through its main collection arms, its field formations,
the Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs) across the country.
Direct tax
Salaries
Interest on securities
Income from property;
Income from business
Capital gains
Corporate tax

Indirect
Sales tax
Custom
Excise
Gas surcharge

Other responsibilities
FBR has the responsibility for (i) formulation and administration of fiscal policies. (ii) Levy and
collection of federal taxes and (iii) quasi-judicial function of hearing of appeals.

SIMILARITIES AMONG IRS, HMRC AND FBR

Taxation system is one of the most complex systems of a countries, each country has its own needs
for a particular type of system. There are few similarities among these three systems

Major tax collecting organization: These three IRS, HMRC and FBR are the major authorities
of their respective countries to raise revenue for their governments through direct and indirect taxes.

Act as regulator: as a regulator they impose tariff on imported goods to support local industries of
their countries and adjust tax rates to prevent inflation and deflation.

Act as allocator: these three bodies act as allocator in their countries by redistributing if social
income among various groups of citizens: to deprive from wealthy people .
Act as controller: they help their states to controls the financial-economic activity of juridical and
natural persons. This also contributes to controlling the sources of income and the directions of
spending.

DISSIMILARITIES
Dissimilarities are;
1. Government intervention
IRS of America and FBR of Pakistan are headed by government officials, as IRS is agency of
government and FBR is headed by ministry of finance, but HMRC of United Kingdom is headed by
senior civil servants to eliminate the government interventions in this system. It does mean that
government has no control over tax system in UK, but with limited authority.

2. Level of taxation
United States of America is a federal republic with separate state and local governments. Taxes are
imposed in the United States at each of these levels. But in UK and Pakistan situation is different.
Taxation occur at federal level

3. Progressive VS regressive tax system

Progressive: It is a tax in which the tax rate increases as the income increases.
Regressive: it is a tax imposed in such a manner that the tax rate decreases as the amount of taxable
income increases.
Pakistan and US has regressive tax system while UK has a progressive tax system.

4. Types of taxes
US and Pakistan has imposed only traditional taxes (direct and indirect) but UK has imposed a new
tax environmental tax to those big companies who affect climate directly or indirectly. Which has
benefitted in the form of 43 billion that is 8% of total revenue in 2011

5. Tax rate dissimilarities among these systems

Pakistan
U.S.A
U.K

Corporate
35%
35%
+
State/Local
20%

individual
7.5-35%
0-12% 0-55.9%
0,20-45%

Payroll
N/A
15.3%-19.1%
0-25.8%

Sales tax
0-35% (basic food
items)
0%-11.725%
(state
and local)
20% standard
5%reduced for home
energy 0% for life
necessities

QUESTION

NO 2: ACCORDING TO YOUR POINT OF VIEW IN THESE THREE TAXATION SYSTEM ,

WHICH SYSTEM HAS A BETTER MECHANISM AS COMPARE TO EACH OTHER ?

Each tax system has its own limitations due to need of countries .Which tax system is best is a tough ask.
It depends from which perspective we are talking from government or tax payer. The taxation system that
maximizes long term economic growth while promoting social stability and protecting the shared
common public resources probably the best tax system.
According to my point of view United Kingdom has relatively better tax system on following grounds

1. Ranking of ITCI
According to International Tax Competitiveness Index (ITCI) of 2015 that seeks to measure the
business competitiveness of national tax systems. the ITCI looks at over 40 tax policy variables, including
corporate income taxes, individual income and payroll taxes, consumption taxes, property taxes, and the
treatment of foreign earnings.. , UK has been ranked 11th and U.S.A ranked 32th out of 34 countries. FBR
of Pakistan was not even included.

2. Less government interventions:

In UK, as explained in previous question, HMRC is non ministerial department that it is not headed by
any government minister. Which makes it independent governing body that has full autonomy to perform
its duties. This ensures more transparency, equality and fairness in taxation system.

3. 0% tax on basic necessities

As explained in previous question that UK has imposed no tax over basic necessities of life. Unlike UK.
Pakistan and U.S tax system impose tax on basics. Its may be due to no government intervention. When
governments are heading tax systems of countries they impose more and more tax on general public.FBR
has imposed up to 35% tax on basic food items which make it difficult for a common man to afford
basics. In UK zero percent tax necessities include not only food items but water, prescription medications,
medical equipment and supplies, public transport, children clothing, books and periodicals also.

4. Environmental taxes
Global warming has become hot topic these days. Large companies must be made liable for their impact
on climate changes only those businesses are exempt using energy efficient technology, or are small
enough that they doesnt use much energy or its the nature of their business . All other businesses are
supposed to pay environmental taxes .it has also raised revenue for UK government 43billion (8% of
total revenue). In Pakistan there is no such tax imposition on big corporation for their negative impact on
climate. And not even in US any such tax has been imposed.

5. Progressive tax system

UK has a progressive tax system where citizens has to pay more when their income increase, or more
simply stated that more you earn more you are liable to pay. Tax burdens are more to be imposed on
wealthy, high earner people than low income people. Pakistan and US has a regressive tax system where
Individuals and entities with low incomes pay a higher amount of that income in taxes compared to highincome earners. Rather than implementing a tax liability based on the individual or entity's ability to pay,
the government assesses tax as a percentage of the asset that the taxpayer purchases or owns. a sales tax
on the purchase of everyday products or services is assessed as a percentage of the item bought and is the
same for every individual or entity. However, a sales tax up to 35% in case of Pakistan has a greater
burden on lower-income earners than it does on the wealthy because the ability to pay is not taken into
consideration.

QUESTION NO 3: WHY
COUNTRYS ECONOMY?

TAXATION CAN PLAY AN IMPORTANT ROLE IN GROWTH OF ANY

Taxation is the process by which the government imposes charges on citizens and corporate businesses.
The charges collected by the government are used to fund different government projects that would in the
end benefit the citizens of the country as a whole. The taxation process can benefit both the society and
business as a whole.
The classical economic were in view that the only objective of taxation was to raise government revenue.
But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days
apart from the object of raising the public revenue, taxes is levied to affect consumption, production and
distribution with a view to ensuring the social welfare through the economic development of a country .

Role of taxation in economic growth:

There is no doubt in this regard that proper and strong taxation system plays an important role in
economic development of a country. The economic development of a country depends various reasons
one of them are on the presence of an effective and efficient taxation policy .

As a source of Funding to Governments

The fundamental objective of taxation is to finance government expenditure. The government requires
carrying out various development and welfare activities in the country. For this, it needs a huge amount of
funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an
important objective of tax.

Encouraging savings and investment:

Since developing countries has mixed economy, care has also to be taken to promote capital formation
and investment both in the private and public sectors. Taxation policy is to be directed to raising the ratio
of savings to national income that is then used by government and policy makers to be invested in
profitable projects of infrastructure and health.

Redistribute Wealth for Common Good

Tax collected by the government is expended for carrying out various welfare activities. Taxes also
redistribute wealth between taxpayers and individuals who receive government assistance. Taxes like the
federal income tax are progressive taxes, which mean that wealthier taxpayers pay a higher proportional
amount in taxes. For those who support progressive taxation, this type of tax helps promote greater
economic and social equality in society. The benefit here is that the wealthiest taxpayers help pay for
programs that support lower-income and middle class citizens, while also contributing to the basic
services that all taxpayers have equal access to. These are the same programs and services that make it
possible to achieve wealth in the first place.

Handle critical economic situation

Tax policy may be used to handle critical economic situation like depression and inflation. In depression,
tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice
verse. Thus the tax policy may be used to strengthen incentives to savings and investment.

As Control system to reduce consumption

Consumption of liquor and luxury goods and to protect the local poor industries from the uneven
competition (For example on luxury cars imports)Taxation is the only effective weapon by which private
consumption can be restricted and thus resources transferred to the state. Thus the economy can ensure
sustainable development. Some taxes only apply to certain products, which has the advantage of reducing
or discouraging consumption. For example, state taxes that apply to alcohol and cigarettes help to reduce
their use. Cigarette taxes also fund anti-smoking campaigns which benefit the public health.

Reduce Unemployment through liberal tax policy

The government can reduce the unemployment problem in the country by promoting various employment
generating activities. Industries established in remote parts or industries providing more employment are
given more facilities. As a result, the unemployment problem can be reduced to a great extent through
liberal tax policy.

Boost Up the Economy

Tax serves as an instrument for promoting economic growth, stability and efficiency. The government
controls or expands the economic activities of the country by providing various concessions, rebates and
other facilities. The effective tax system can boost up the economy

To start Special Projects

Taxes also give voters and taxpayers the ability to select and fund special projects that they feel their
communities need. This is the case when voters cast a vote for or against a special proposition or ballot
measure that includes a temporary tax increase to fund a specific project. Public transportation,
infrastructure and school improvements are some of the programs that a vote measure may ask voters to
consider.

Referenc
es
g/articl
e/2015
h
t
t
p
:
/
/
t
a
x
f
o

interna
tionaltaxcompet
itivene
ssindex
http://
www.f
br.gov.
pk/

u
n

https://www.irs.gov

https://www.gov.uk

/government/organi

sations/hm-

revenue-customs

http://hubpages.co

m/education/Role-

of-Tax-in-the-

Economic-

Deve ent-of-a-Country
lopm