International Conference on Education For Economics, Business, and Finance (ICEEBF) 2016
ISSN (Print) 2540-8372 ISSN (Online) 2540-7481
Creating Better Human Development through Taxation Thomas Soseco Faculty of Economics, Universitas Negeri Malang Email:
[email protected] Abstract Higher human quality can be created by building work situation. One way to implement that is through build better taxation system. Inefficient taxation procedures may lead to unecessary costs. This research is aimed to explore the relationship between taxation system and human development. Data used are secondary data obtained from international organizations. The results are there was a negative relationship between number of taxes paid and duration needed to prepare, file, and pay taxest to human development index. The conclusions are there was a negative relationship between the number of tax paid by businesses to HDI. Also, there was a negative relationship between duration needed to prepare, file, and pay taxes to HDI. The suggestions are: government have to reduce the number of tax taken from businesses and implement new procedure and technology to make more efficient taxation system. Keywords: human development index, tax, work situation
I.
Introduction
Human development is one indicator to measure success in development. Human capital creation can be created through various channel: education, health, knowledge, informtion technology, and work situation. Work situation plays important role because it not only increase human capital but also can increase nation’s competitiveness through its firms. competitive firms can obtain higher benefits and give more contribution to their workers and the society. One nation’s competitivenes can be implemented by build good taxation system. Tax collected from citizen and firms must be carefully managed. It involved prevent inefficient procedures that may leads to unnecessary costs. For example, government can reduce number of taxes paid by firms. The more taxes paid by citizen shows to much attention needed to pay taxes. The other example is government may reduce time needed for firms to prepare, file, and pay taxes. By reducing the time, firms can allocate their resources to production process, to create better products and finally give benefits to their workers. This article tries to explore how taxation system may affects human development efforts in one country. This article divided into six sections: introduction, theoretical background, methodology, results, discussions, and conclusions. II.
Theoretical Background
The Use of Taxation to Redistribute Income Income distribution is the main target of develoopment. Every nation will gain success if there is no excessive unequal income distribution. It means,
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government must do appropriate taxation policy. Taxation can be used to redistribute income. This can be implented by impose higher tax on rich people comparing poor people. For sure, this policy need advance tax system. There are several criteria to build a good tax system. They are: 1. Horizontal equity. According to horizontal equity, people in the same circumstances should be taxed equally. In other words, taxes should be levied impartially. For example, people earning the same level of income and with the same personal circumstances (e.g. number and type of dependants, size of mortgage, etc.) should pay the same level of income tax. 2. Vertical equity. According to vertical equity, taxes should be ‘fairly’ apportioned between rich and poor. What constitutes fairness here is highly controversial. No one likes paying taxes and thus a rich person’s concept of a fair tax is unlikely to be the same as a poor person’s. This whole question of using taxes as a means of redistributing incomes will be examined in detail below. 3. Equity between recipients of benefits. Under the benefit principle, it is argued that those who receive the most benefits from government expenditure ought to pay the most in taxes. For example, it can be argued that roads should be paid for from fuel tax. That way those who use the roads the most will pay the most towards their construction and maintenance. 4. Cheap to collect. Taxes cost money to collect. These costs should be kept to a minimum relative to the revenue they yield. 5. Difficult to evade. If it is desirable to have a given tax, people should not be able to escape paying. A distinction here is made between tax evasion and tax avoidance: • Tax evasion is illegal. This is where, for example, people do not declare income to the tax authorities. • Tax avoidance is legal, albeit from the government’s point of view undesirable. This is where people try to find ways of managing their affairs so as to reduce their tax liability. They may employ an accountant to help them. 6. Non-distortionary. Taxes alter market signals: taxes on goods and services alter market prices; taxes on income alter wages. They should not do this in an undesirable direction.If prices are not distorted in the first place, it is best to use taxes that have the same percentage effect on prices of all goods and services. That way relative prices remain the same. 7. Convenient to the taxpayer. Taxes should be certain and clearly understood by taxpayers so that they can calculate their tax liabilities. The method of payment should be straightforward. 8. Convenient to the government. Governments use tax changes as an instrument for managing the economy. Tax rates should thus be simple to adjust. Also, the government will need to be able to calculate as accurately as possible the effects of tax changes, both on the total tax yield and on the distribution of the burden between taxpayers. 9. Minimal disincentive effects. Taxes may discourage people from working longer or harder, from saving, from investing or from taking initiative.
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Taxes as a means of redistributing income If taxes are to be used as a means of achieving greater equality, the rich must be taxed proportionately more than the poor. The degree of redistribution will depend on the degree of ‘progressiveness’ of the tax. In this context, taxes may be classified as follows: Progressive tax. As people’s income (Y) rises, the percentage of their income paid in the tax (T) rises. In other words, the average rate of tax (T/Y) rises. Regressive tax. As people’s income rises, the percentage of their income paid in the tax falls: T/Y falls. Proportional tax. As people’s income rises, the percentage of their income paid in the tax stays the same: T/Y is constant. An extreme form of regressive tax is a lump-sum tax (e.g. a poll tax). This is levied at a fixed amount (not rate) irrespective of income. Figure 1. illustrates these different categories of tax. Diagram (a) shows the total amount of tax that a person pays. With a progressive tax, the curve gets progressively steeper, showing that the average rate of tax (T/Y) rises. The marginal rate of tax (ΔT/ΔY) is given by the slope. Thus between points x and y the marginal tax rate is 40 per cent. Diagram (b) shows the average rates. With a proportional tax, a person pays the same amount of tax on each pound earned. With a progressive tax, a larger proportion is paid by a rich person than by a poor person, and vice versa with a regressive tax. The more steeply upward sloping the average tax curve, the more progressive is the tax, and the more equal will be the post-tax incomes of the population. Figure 1. Different Categories of Tax
Source: Sloman (2006) Human Development People with higher human development, notably with good health and education, are more resilient than those who are malnourished, without education and thus in a weaker position to change their activity or location in reaction to adverse shocks. Owning assets enables people to protect their core capabilities by using these assets when circumstances deteriorate. But the social context and power relations have a large bearing on people’s vulnerability. Minorities or people with
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disabilities, for instance, even those healthy and educated, may feel vulnerable if they cannot express their concerns openly, if the political system does not take their voices seriously or if institutions do not serve them well. Similarly, the nature of the risks—especially when persistent or systemic—matter in shaping specific vulnerabilities. Rising sea levels, for example, present a long-term risk to coastal communities. HDI measures human development through three aspects: longevity, which mesured from life expectancy of birth, knowledge (measured from mean years of schooling and expected years of schooling), and standard of living (measured from Gross National Income per capita). HDI classifications are based on HDI fixed cut-off points, which are derived from the quartiles of distributions of component indicators. The cut-off points are HDI of less than 0.550 for low human development, 0.550–0.699 for medium human development, 0.700–0.799 for high human development and 0.800 or greater for very high human development. III. Methodology This is a quantitative reasearch using quantitative data obtained from international organizations. Data needed are taxation condition, which measured from number of tax payments annually and time needed for business to prepare, file, and pay taxes. Also, this research used HDI. IV. Results Worldbank classifies countries based on their per capita income. Lowincome economies are those with a GNI per capita of $1,035 or less in 2012. Middle-income economies are those with a GNI per capita of more than $1,035 but less than $12,616. Lower-middle-income and upper-middle income economies are separated at a GNI per capita of $4,086. High-income economies are those with a GNI per capita of $12,616 or more. In 2015, from 151 countries, the lowest income country was Togo which gain S547,90. While the highest income country was Switzerland with $80.214,73. From table 2, number taxes payable by business in 2015 were different across countries. The lowest were 3 times every year in Saudi Arabia and Hongkong and the highest were in Venezuela (70 times). In general, businessmen pay 26 times taxes a year. Table 2. Descriptive Analysis HDI 0.657535 0.710000 0.941000 0.360000 0.188075 -0.959350 4.272257
INCOME 2774796. 5143.940 3.80E+08 275.9800 32195403 11.65988 136.9710
TAXPAYMENTS 26.27027 25.50000 70.00000 3.000000 16.73995 0.388097 2.043567
TAXTIME 262.7878 217.5000 1025.000 12.00000 174.5874 1.983758 7.578149
Jarque-Bera Probability
31.80027 0.000000
107099.8 0.000000
9.356324 0.009296
226.3205 0.000000
Observations
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139
148
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Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis
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In 2015, there are difference in time to prepare, file, and pay taxes by business. The longest taxation procedure duration was in 1.025 hours in Bolivia. In contrary, businesses only need 12 hours to prepare, file, and pay taxes in United Arab Emirates. On average, time needed to do those steps were 262 hours. From table 3, there was negative relationship between number of taxes paid by firms to HDI. The more taxes paid, the lower HDI existed. Firms in Norway, the highest HDI country, only pay 4 taxes annually, with time allocated to prepare, file, and pay taxes 83 hours. In contrary, firms in Central Africa, a country with lowest HDI in the world, must pay 56 different taxes and total time needed is 483 hours. Indonesia has slightly difference in number of taxes (54 taxes) but quite large difference in time needed to prepare, file, and pay taxes (234 hours) resulting Indonesia in position 110 with HDI 0.684. Table 3. Correlations HDI
INCOME
TAXPAYMENT S HDI 1 0.0337794662812 -0.580306161804 INCOME 0.0337794662812 1 -0.108525567175 TAXPAYMENT -0.580306161804 -0.108525567175 1 S TAXTIME -0.304470017519 0.0508512420993 0.378413649832
TAXTIME -0.304470017519 0.0508512420993 0.378413649832 1
V. Discussions Work and human development are synergistic. Better work condition allow firms to give better wage, security, and to empower women. Also, firms are open to participation and recognition. Firms also allows for creativity and innovation. Those conditions can provide higher human development through better health, knowledge and skills, awareness, oppotunities, and choice. At the end, they can provide higher labour’s productivity. The relationship between work and human development can be seen in figure 2. Figure 2. The Synergi between Work and Human Development
Source: Worldbank (2015)
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. One important aspect to create better work situation is through taxation system. Taxes are obligatory. But citizen need efficient taxation system. The more taxes paid and longer duration needed are the indication that those country have relatively weak tax system. This can causes extra costs imposed on businesses and causes higher prices. Firms are not able to provide better benefits for their workers, for instance in higher wages or better security. Thus, workers will difficult in increase their health, knowledge, and skills. At a result, this can prevent creation of high human quality. High HDI countries have little taxes paid by firms. It means that government can merge or even delete unnecessary taxes. Also, by using technology, firms only need to spend relatively little time to prepare, file, and pay taxes. Thus, firms have enough resources to increase their products’ quality or give many benefits to their workers, for instance in higher salary and condusive office situation. The different situation existed in low HDI countries. With so many taxes must be paid, indicated that government, whether central or local, tries to get income as much as possible from business activity. Those situation also apply in small scale companies or start-up businesses. By imposing many taxes even in small scale businesses, businesses must allocate more resources (time, costs, or staffs) to administer taxes. Firms will difficult to give higher salary or create condusive office situation. Inefficient taxation system also create corruption and collusion practices. With difficult taxation system, firms are tend to find easier ways to solve their obligation. It including hiding tax statements (revenue, expenditure, or assets) by consultating with tax consultants. In larger scale, firms make prohibited deals with tax officers to manipulate taxes. Most corrupt countries also indicated by relatively low HDI. Figure 3. Corruption Perception Index
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Courruption leads to many problems. With many potential official income are perverted by personals, governments do not have adequate funds for development. Wilhelm (2002) found a "very strong significant correlation" between the Corruption Perceptions Index and two other proxies for corruption: Black Market activity and overabundance of regulation. All three metrics also had a highly significant correlation with real gross domestic product per capita (RGDP/Cap). The Corruption Perceptions Index correlation with RGDP/Cap was the strongest. Therefore, it is important to make more efficient taxation system. By reducing unnecessary taxes or merge taxes. Also, government have to implement technology to make more efficient taxation system. VI. Conclusions The conclusions are there was a negative relationship between the number of tax paid by businesses to HDI. Also, there was a negative relationship between duration needed to prepare, file, and pay taxes to HDI. The suggestions are: government have to reduce the number of tax taken from businesses and implement new procedure and technology to make more efficient taxation system.
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