07.03.2021, 19:31

To know how reasonable tax regulation is

To know how reasonable tax regulation is

The issue or adjustment of tax policies is never simple, as inclination towards one group will be disadvantageous for another. A reality is that the percentage of the high-income group or the rich is much lower versus the low- and middle-income groups but they have more influence on policies - PHOTO: THANH HOA

One of the important roles of the tax sector is to ensure social equality through the regulation of the income gap between high-income and low-income groups. However, it’s hard to know whether the regulation is reasonable or not if attention is paid only to personal income tax but not the overall tax system.

It is questionable that why there are countries where their governments impose the high personal income tax but their people still agree with the policy and which are the dream place for living and working by many people worldwide, while there are countries where the personal income tax seems not high but the life of middle and low-income people is getting more difficult.

The revenue from taxes, fees and charges is always the largest share in the budgets of governments; among them three important taxes are the value added tax (VAT), the corporate income tax (CIT) and the personal income tax (PIT). The percentage of these three taxes is a factor with which one may know whether the low-income group is “shared” as finely expected by the tax sector.

When the percentage of the PIT in the total tax revenue is low (projected at 10% in 2021 in Vietnam), the burden will shift to the VAT, which low-income people must also pay for what they buy. The issue is what goods and services are subject to the VAT and the tax rates for them.

The low-income group is obviously not “shared” at all when there are essential goods and services which must be subject to the VAT instead of zero tax and the tax gap is offset by the VAT for goods and services generally reserved for high-income people. Many low-income people who are not in the category of PIT payment do not know that they still have to pay tax through their everyday purchases, directly such as the VAT, and indirectly through taxes included in the prices of goods and services. Take for example, people already pay tax when they buy a kilo of rice, a liter of fish sauce, a cubic meter of water, a kilowatt hour of electricity or a liter of gasoline.

With regard to cases of high PIT (over 30% in most developed countries, with Denmark in particular imposing a rate of 52.38% in 2019), what matters are the taxable incomes and the tax rates. It may come as a surprise that around 55% of households in France are not in the category of PIT payment, as the taxable income in France starts from 10,064 euros/“part”/year (for example a couple with two children are counted as three “part”) with the progressive tax rate of 11% for the first threshold of 10,064-25,659 euros and 45% for the fifth or final threshold of 157,806 euros upwards. So, the low tax levels and the high tax differences and thresholds are really the sharing of the high-income group with the low-income group.

The second factor which is equally important for knowing whether the tax regulation is reasonable or not is the payment for items which must be counted as per salary (also seen as a tax on salary, including social insurance and other payments depending on countries) and social welfares provided by the government.  

In some countries, the percentage of payment for such items is very high. The average payment is 36% in countries in the Organization for Economic Cooperation and Development (OECD), and is higher in such countries as France, Austria, Italy and Germany with over 45% and Belgium 52%. In return, the social insurance and more generally the social welfare in these countries are very good. For example, medicine and healthcare are basically free, public education is very cheap and almost free, and vulnerable people in society have good allowances.

Because of the transparency of the government, social welfare policies must be good so that people do not have to manage for saving or to worry much when risks occur; and so no matter how high the tax on salary or the personal income tax is, people are still satisfied because they and their families are protected, and further it is the sharing with more disadvantaged people in society.

The issue or adjustment of tax policies is never simple, as inclination towards one group will be disadvantageous for another. A reality is that the percentage of the high-income group or the rich is much lower versus the low- and middle-income groups but they have more influence on policies. A large part of people in the high-income group, generally those with high education and good jobs, will be willing to share with people in the low-income group if their tax money is used legitimately; otherwise, low-income people will bear a heavier tax burden (as per the percentage of income and net savings).

To make tax really a tool for income regulation, governments should balance the three important taxes towards a heavier burden of the VAT and the PIT for the high-income group. The CIT and the property tax for rich people are also the buffers for tax reduction for low-income people, but the side-effects should be considered, as the high CIT will negatively affect employment and rich people will seek to declare tax in another country.