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Monday, November 8, 2021

Why Paying Taxes is Crucial to the Economy, and Why the Wealthy Should Pay More on Taxes

I used to hate paying taxes. I mean, who doesn't. After all, it is your hard-earned money. Yes, unemployment is at an all-time low, and the stock market DJIA is at an all-time high, but average hardworking Americans are still struggling to get ahead. Inequality has gotten so out of hand that it is stifling US growth.
Warren Buffett, who is my mentor and someone I admire, believes the government should tax the wealthy more. Warren Buffett believes that the wealthy in America do not pay enough taxes. "The wealthy are undertaxed relative to the general population," he told CNBC's Becky Quick "Squawk Box." In this article, I will bring up the topic to the fundamental understanding behind taxation. Then I will explain why it is crucial to tax more of the rich people. Moreover, I will also explain the cons to this idea. In the end, I will talk about my opinion about taxing more of the wealthy.
Why do Tax Rates and Tax administration matter?
To promote economic growth and development, governments require long-term funding for social programs and public investments. Health, education, infrastructure, and other services programs are critical to achieving the common goal of a prosperous, functional, and orderly society. They also demand that governments increase their revenue. Taxation pays for public goods and services; it also plays an essential role in the social contract between citizens and the economy. How taxes are collected and spent can determine a government's very legitimacy. Holding governments accountable promotes effective tax administration and, more broadly, good public financial management.
All governments require revenue, but the challenge is to select the tax rate and tax base carefully. Governments must also create a tax compliance system that does not discourage taxpayers from participating. According to recent firm survey data for 147 economies, companies consider tax rates one of the top five constraints to their operations and tax administration to be one of the top eleven. Firms in economies that rank higher on the Doing Business ease of paying taxes indicators see tax rates and tax administration as less of a barrier to business.

Why Tax Rates Matter?
The amount of tax paid by businesses is vital for investment and growth. Businesses are more likely to opt-out of the formal sector where taxes are high. According to one study, higher tax rates are linked to fewer formal businesses and lower private investment. A ten-point increase in the effective corporate income tax rate is associated with a reduction in the investment-to-GDP ratio of up to two percentage points and a reduction in the business entry rate of about one percentage point. A tax increase equal to 1% of GDP reduces output by nearly 3% over the next three years. According to research on multinational firms' investment decisions, a one-percentage-point increase in the statutory corporate income tax rate reduces local profits from existing investment by 1.3 percent on average. An increase of one percentage point in the effective corporate income tax rate reduces the likelihood of establishing a subsidiary in an economy by 2.9 percent.
Profit taxes are only a portion of the total cost of doing business (around 44 percent on average). The nominal corporate income tax in the Central African Republic, for example, is 30% of net income. However, the total business tax bill – even after deductions and exemptions – is 72.1 percent of commercial profit due to a variety of other taxes (a minimum lump-sum tax, property tax, tax on financial transactions, two labor taxes and social contributions, the business license duty, the environmental tax, and stamp duty).

Maintaining reasonable tax rates can promote the development of the private sector and the formalization of businesses. Small and medium-sized businesses benefit most from low tax rates, which contribute to economic growth and employment but do not contribute significantly to tax revenue. Typical tax revenue distributions by firm size for economies in Sub-Saharan Africa, the Middle East, and North Africa show that micro, small, and medium-sized enterprises account for more than 90% of taxpayers but contribute only 25–35% of tax revenue. Imposing high tax burdens on small businesses may not add much to government tax revenue, but it may cause businesses to shift to the informal sector or, worse, cease operations.
In Brazil, the government established Simples Nacional, a tax regime designed to simplify tax collection for micro and small businesses. The program reduced overall tax costs by 8% and contributed to an 11.6 percent increase in the business licensing rate, a 6.3 percent increase in microenterprise registration, and a 7.2 percent increase in the number of firms registered with the tax authority. Revenue collections increased by 7.4 percent due to increased tax payments and social security contributions. Simples Nacional was also credited with increasing formal-sector firms' revenue, profit, paid employment and fixed capital.
Businesses are concerned with what they receive in return for their taxes. Because it is essential in determining the location of economic activity and the types of sectors that can develop, quality infrastructure is critical for the smooth operation of an economy. A healthy workforce is critical to an economy's competitiveness and productivity—investing in healthcare delivery is critical for economic and moral reasons. Basic education improves worker efficiency, and high-quality higher education and training enable economies to move up the value chain beyond simple manufacturing processes and products.
Around the world, the efficiency with which tax revenue is converted into public goods and services varies. Recent data from the World Development Indicators and the Human Development Index show that economies with relatively low total tax rates, such as Ireland and Malaysia, generate tax revenues efficiently and convert the gains into high-quality public goods and services. The data for Angola and Afghanistan show the inverse. Economic development frequently increases the need for new tax revenue to finance rising government spending. At the same time, an economy is required to be able to meet those needs. However, how revenue is spent is more important than the level of taxation. High tax rates and ineffective tax administration are not the only reasons for low tax collection rates in developing economies. The size of the informal sector is also essential; the tax base is much narrower in the informal sector because most workers earn meager wages.
Why Tax Administration Matters?
Efficient tax administration can encourage businesses to become formally registered, broadening the tax base and increasing tax revenues. Unfair and capricious tax administration will likely bring the tax system into disrepute and reduce the government's legitimacy. Failure to improve tax administration when new tax systems were introduced in many transition economies in the 1990s resulted in uneven tax imposition, widespread tax evasion, and lower-than-expected tax revenue.
Compliance with tax laws is critical to keeping the system running and supporting programs and services that improve people's lives. Keeping the rules as clear and straightforward as possible is one way to encourage compliance. Overly complicated tax systems are associated with high levels of tax evasion. High tax compliance costs are linked to larger informal sectors, higher corruption, and lower investment. Economies with simple, well-designed tax systems can stimulate business activity and, as a result, investment and employment. The study finds that the ease of paying taxes, regardless of the corporate tax rate, is an essential determinant of firm entry. A six-year study of 118 economies found that a 10% reduction in the administrative tax burden (measured by the number of tax payments per year and the time required to pay taxes) resulted in a 3% increase in annual business entry rates.
Tax administration is changing as the ecosystem in which it operates expands and deepens, owing primarily to the massive increase in digital information flows. Tax administrations are addressing these challenges by introducing new technology and analytical tools. They must rethink their business models, promising lower costs, increased compliance, and incentives to compliant taxpayers. 13 Tajikistan's government has made tax reform a top priority in its efforts to achieve its development goals. Tajikistan launched the Tax Administration Reform Project in 2013, resulting in a more efficient, transparent, and service-oriented tax system. The modernization of IT infrastructure and the implementation of a unified tax management system increased efficiency while reducing physical interactions between tax officials and taxpayers. After enhancing taxpayer services, the number of active firms and individual taxpayers filing taxes has more than doubled, and revenue collections have increased significantly. In Tajikistan, a taxpayer spent 28 days in 2016 complying with all tax regulations, compared to 37 days in 2012.

Tax compliance at a low cost and efficient procedures can make a significant difference for businesses. The standard case study firm, for example, would have to make only three payments per year in Hong Kong SAR, China, and Saudi Arabia, the lowest number of payments globally, and it would have to make four payments in Qatar, which are still among the lowest in the world. In Liechtenstein and Estonia, complying with profit tax, VAT, and labor taxes and contributions takes only 49 and 50 hours per year or six working days.
According to research, it takes a Doing Business case study company longer to comply with VAT than corporate income tax. The time it takes a company to comply with VAT requirements, on the other hand, varies greatly. According to research, this is explained by differences in administrative practices and how VAT is implemented. Compliance takes lesser time in economies where the same tax authority administers VAT and corporate income tax. The use of online filing and payment also reduces compliance time significantly. The frequency and length of VAT returns are also important considerations; submitting invoices or other documentation with the returns adds to the compliance time. It is critical for VAT systems to work efficiently if the compliance process is streamlined and the time required to comply with the requirements is reduced. 
Why Would It Be Good to Tax More of the Wealthy?
Democrats argue that raising taxes on the wealthy would help the economy grow faster. That runs counter to decades of Republican trickle-down orthodoxy, which has resulted in the United States have a lower total tax burden than only three other developed countries — without delivering the economic jolt that was repeatedly promised.
It is not just Senators Elizabeth Warren and Bernie Sanders who support taxing the wealthy, which would affect roughly one out of every 500 people. Even Joe Biden, who is mocked as a moderate, proposes significant tax increases on the wealthy if he is elected president. (Keep in mind that President Obama also wanted to tax the wealthy more, but he could not get Congress to agree, even though taxing the wealthy polls well.) Other Democrats may experience the same outcome.)
Many people in the United States believe that the system is rigged against them. Prices for necessities like health care, daycare, education, and housing are rising faster than wages. The economy would directly benefit from a more equitable income distribution because middle- and low-income families spend a more significant portion of their incomes than the very wealthy, resulting in more money recycling through the economy. The economy would benefit if everyone could take advantage of the opportunities currently being hoarded by the wealthy. How many great leaders, thinkers, and inventors were never given the opportunity?
We inherit our parents' and grandparents' social class, wealth, and political power to a startling degree. Wealth inequality causes a slew of other issues. The top 1% is amassing a larger share of the nation's wealth, to the point where ordinary Americans are struggling to find the funds they need to buy homes, invest in education, and start new businesses. The poorest half of Americans has only 2% of total wealth, half of what their parents had 25 years ago. Meanwhile, the share owned by the top 1% of families has risen to 32%.
The federal government, which could invest more in combating climate change, building infrastructure, and reorganizing health care, daycare, and education to make them more affordable, is also short on resources.

What is wrong with Wealth Taxes?
There are numerous arguments against taxing the wealthy. Lily Batchelder and David Kamin, law professors, provide a comprehensive debunking.
Some argue that taxes on wealth would essentially destroy Capitalism or, at the very least, slow its growth rate. They argue that a wealth tax would reduce incentives for entrepreneurs, stifle innovation and technological progress, and it would chastise success.
They argue that higher taxes would be unjust. Why defy human nature when there are always poor people?
Furthermore, some critics argue that imposing a wealth tax would be pointless because the wealthy have the means to avoid paying taxes by moving their assets abroad, hiding them, or hiring creative lawyers, accountants, and lobbyists to create and exploit loopholes.

Let us take a look at each of these issues individually.
• Would a wealth tax annihilate Capitalism?
No. Capitalism has have been quite successful under a variety of tax regimes. In the 1950s and 1960s, when the rich were taxed more heavily, wealth inequality was much lower in the United States and capitalism thrived even as workers received a larger share of a growing pie.
When competition is absent, it appears that extreme wealth thrives. Rent-seeking behavior results in a dysfunctional economy. Many needs go unmet while the wealthy buy art, buy fifth and sixth mansions, force corporations to hand over more profits, and keep the equivalent of the annual federal budget under their mattresses. It reminds me of Abraham Lincoln's annoyance with his slacker general: "If General McClellan is not going to use his army, I would like to borrow it for a while." Perhaps the people could put some of that extra money to good use because the rich will not miss it.
• Would it suffocate innovation and the desire to succeed?
Money is a powerful motivator, but it is not the only one. Most successful people desire more than money: they desire to be the best, to build something, to solve a problem, to be their own boss, and to be famous. 

They want to succeed, and money is only one way for them to do so.
A wealth tax would not affect any of those other motivations; in fact, it might encourage the notoriously slothful offspring of millionaires to do something with their lives.
• Would a wealth tax be used to punish success?
Had you rather have a tax failure? Best wishes! More seriously, taxes are the cost of living in civil society, not a punishment.
• Would they violate the natural order?
Concentrated wealth is not a natural phenomenon, and humans created the economic system, not God, nature, or an invisible hand. Money and political power shape the economy's structure, determining which property rights are respected and violated.
• Is it fair to tax the wealthy?
 Life is not supposed to be fair, and the poor are constantly reminded of this. Let it go.
• Would a wealth tax result in double taxation? Once as a source of income and then as a source of wealth?
Already, double taxation is ordinary. This argument is a red herring because I am taxed three times on my income (federal and state income taxes plus FICA for Social Security), twice on my purchases, and once on my property. Furthermore, much of the highly wealthy's wealth is never taxed, not even once. The wealthy postpone realizing their capital gains to avoid paying taxes and then pass on their property to charity or their heirs without ever seeing a tax collector.
• Wouldn't the wealthy be able to lobby Congress to include numerous loopholes in a wealth tax, making it easy to avoid paying?
Bingo! They could, of course, which demonstrates the wisdom of taxing large fortunes. Billionaires and multi-millionaires wield enormous political power and frequently bend the law to their liking, far from democratic. Money breeds power, which is a compelling reason to limit how much anyone or family can amass.
As Batchelder and Kamin point out, enacting a strict wealth tax may not be any more difficult politically than enacting more modest reforms like beefing up enforcement and repealing the 2017 tax bill. A wealth tax would be a clean slate, and a simple bill might be more resistant to special interests' pleading.

My View on Paying More Taxes for the Wealthy Individual.
I support taxing wealthy people more, and I believe this can help the nation prosper with more equality and better living standards. This, of course, requires an inevitable regulation from government officials NOT to corrupt taxpayers' money. The problem in my country is that every business owner wants to avoid paying taxes due to corruption in the system. However, President Jokowi issued a tax amnesty program for forgiveness for 'tax evaders' in 2016, and this gives the incentive for people to file their taxes. 
My father believes the Tax Amnesty program that President Jokowi issued was an excellent idea. This program gives the incentive for business owners to go legit and transparent about their earnings and assets they own. He knows that under President Jokowi's supervision, taxpayers' money will go to the right place in Indonesia, such as building infrastructure, education, health care, and most importantly, the poor people living in Indonesia. President Joko Widodo expressed gratitude for the participation of the community or the taxpayer's tax amnesty program success ( tax amnesty ). The achievement of the tax amnesty program in Indonesia is the highest in the world, with an asset disclosure value of IDR 4,884.2 trillion. It consists of a declaration of domestic assets of Rp. 3,700.8 trillion, a declaration of foreign assets of Rp. 1,036.7 trillion, and repatriation of assets reaching Rp. 146.7 trillion.
The wealthy need to pay more taxes since it will help build my country into a better place. What is the point of being the wealthiest person in the country but having poor quality infrastructure and living standards? For example, let us say you are a wealthy person in Indonesia, and you have the money to purchase an exotic sports car such as a Lamborghini. However, how are you even going to enjoy driving the luxury sports car if the roads are messed up? You are not going to enjoy driving the exotic sports car at all.
Moreover, I also believe that the wealthy pay more on taxes; it can benefit them. If a country that prospers, it automatically helps increase the nation's wealth and value. For example, property prices are likely to be more expensive in a location with the proper infrastructure than with poor infrastructure. In addition, the economy requires dependable infrastructure to connect supply chains and efficiently move goods and services across borders. Infrastructure connects households across metropolitan areas to higher-quality employment, healthcare, and education opportunities. Clean energy and public transportation can help to reduce greenhouse gas emissions. 
Furthermore, infrastructure investment can have ramifications beyond the supply chain. According to the Center on Budget and Policy Priorities, improved road conditions, transportation services, and even water treatment plants are critical factors in an individual's health, career, and education. Focusing on these factors through the structural foundation of a country improves citizens' quality of life. Infrastructure is critical in a variety of ways. The ability to transport citizens quickly and safely to school, work, hospitals, and public spaces is exceptionally beneficial to a country. The local economy is also significantly stimulated by mobilizing citizens, both literally and metaphorically.

Bottom Line
I hope after readers read this article, I just finished writing about the importance of tax. I know it can be annoying to use hard-earned money to pay the government; however, the long-term impact is more beneficial for society. I personally believe that paying taxes is mandatory. In fact, I believe the wealthy need to pay more. By paying taxes to the government, you make the country you live in grow and develop into a better place. So what is your thought on paying taxes? Let me know in the comment section below.

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