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Taxation Definition

What is Taxation?

Tax is simply a percentage of your cashflow paid to a government to provide services that are shared by the community.

This is a complex area to fully describe but essentially most people live in a country which has a government that is there to set laws and provide services. This costs money and as money is a medium of people’s effort, it cannot be just magically printed (leading to inflation), so governments must take a portion of everyone’s (people, companies, organisations, trusts, etc.) effort to pay for shared services like policemen, government employees, roads, trains, sewerage and other services under the government’s care.

Types of Taxation

Taxes come in many shapes and sizes (depending on the country and territory) but the most common are:

Taxation Must be Fair

If the government doesn’t tax all effort, some people will use the areas not taxed to avoid tax. That is human nature. Those that do not pay tax ensure that those who do pay tax need to pay more to fill the gap. For example companies are taxed less in some countries than top earning individuals, so many people setup companies and run their cashflow through a company although there’s no real reason to do this other than to minimise tax. Some may say this is immoral, but if it is legal then there is nothing wrong with this. The tax departments have now developed rules to make this more difficult, so make sure you know your tax laws.

 

Issues with taxation that arise are caused by:

Unequal taxation rates involves those who earn more paying a higher tax rate than those earning less. This arrangement annoys the entrepreneur who works very hard, provides jobs directly, and indirectly through their purchases. The entrepreneur may find legal and illegal ways to avoid tax, thus unbalancing the taxation system. The entrepreneur makes it their business to boost trade, provide jobs and they sacrifice a lot to do so, such as their spare time, family, friends and more. Do those that work hard have to be punitively taxed? There are better ways.

A Suggestion for a Taxation System

In my opinion taxation needs to be flat for individuals and companies with one modest rate for all. This provides more disposable income for spending and saving. Consumption (purchases) taxation is changed periodically to manage inflation and to ensure savings, which are also taxed but at a lesser rate. This promotes equality, national savings, and boosts the economy from which there is more public money from the fixed taxation rate. During economic downturns the national savings can be used to boost the economy instead of increasing debt (which could lead to a national debt trap). Those that are jealous of successful people now have 'less' in their way and may be more inclined to add to the economy. Governments can also draw taxation from savings which can keep the income and company tax rates low.

Tax Evasion

Taxes need to be paid and evasion is illegal, although it is legal to pay no more than you have to. Many tax laws provide for deductions which lower your total taxable income from the gross amount an individual or company earns. Make sure you know what your taxes and deductions are for anything you are engaged in or are planning. Pleading ignorance in court will get you nowhere and the fines are usually heavy. Speak to an accountant for advice even if you plan on administering your own accounts, the one or two hours spent will provide a great return on investment even in the first year.

Look at Taxation in a Positive Way

Remember it’s your government supporting you with a decent environment to live in (even if you may find it imperfect). By living in your country YOU (self-responsibility) have chosen by default to use those services, police, fire brigade, roads, water, and so on. If you don't like a service then help improve it - get involved in your community.

Another great point about taxes is that you only pay taxes if you are earning and spending. Look on the bright side, if you are paying a lot of tax it is because you are successful, earning and spending a lot, be thankful as many are not getting the opportunity to pay as much tax ( I know, a bit cheeky, but why be negative). Just make sure you’re not paying more than you legally have to. By evading taxes, you are cheating yourself, the people you love, and the community. Concentrate your efforts on earning more income, not evading tax.

 

Hopefully you live in a country or territory where elections allow you to choose the government policies which suit you. Vote for the people who will provide what you want in your life. If a government taxes too much they are providing too much to the community, they are inefficient / ineffective, or a combination. Vote for people who will provide a balance that you like. If no-one is good enough for your vote then run for office, or work with a team who can. Complaining will not change anything.